Photographer: SeongJoon Cho / Bloomberg
Photographer: SeongJoon Cho / Bloomberg
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Retail investors determined to see stocks rise have made life miserable for short sellers around the world.
In South Korea, the government is also piling up.
Lawmakers overseeing the country’s $ 2 trillion stock market discuss plans to renew one of the world’s longest bans on short selling, under pressure from mom-and-pop gamblers who conduct more than two-thirds of daily trading .
Calls to make the 10-month ban permanent are on the rise. More than 202,000 people have signed a petition begging President Moon Jae-in to make short selling illegal – crossing a threshold of 200,000 forcing him to provide an official response. Moon’s Prime Minister has already done it called the practice “undesirable”.
While much of the financial world has watched every turn in the battle between retail investors and short sellers GameStop Corp., South Korea has quietly become a major battleground in the on-again, off-again debate over the role of bearish trades in stock markets.
Retail Frenzy
As the pandemic worsens, individual investors have overtaken institutions and foreigners in the Korean stock market
Source: According to Koscom Corp., which provides financial data from Korea Exchange
With national elections scheduled for early next year, policymakers in Seoul are reluctant to anger thousands of Koreans who fell in love with stock trading during the pandemic. The head of a Korean retail investor advocacy group has called short selling “evil” and a protest the practice outside government buildings. Meanwhile, the International Monetary Fund has urged South Korea to end the ban on short selling, as it risks making the market less efficient and more difficult to hedge.
“As financial conditions in Korea and the functioning of the market have now stabilized after the Covid outbreak, we believe that there are conditions to restore this practice of short selling,” said Andreas Bauer, an official with the fund. at a virtual press conference on the Korean economy on Thursday.
Like other countries, South Korea saw its stock market drop in March as the pandemic intensified. Stock prices then bottomed out three days after the short selling ban took effect, aided by a flood of central bank liquidity and retail purchases. The country’s benchmark Kospi index ended 2020 with a gain of 31%, the best performance worldwide after Nigeria’s stock measure. The Kospi is up another 6.8% so far this year.
While other markets, including France and Italy, also introduced short-selling bans around the same time, South Korea is now the only country besides Indonesia to stick with the restriction.
An investigative article that has been covered extensively by local media has helped fuel the population’s anger towards short sellers. Written by professors at Hanyang University in Seoul, it showed that short sellers in Korea – most of them foreign investors – made an average of $ 2 million in profit per day between 2016 and 2019. Investors who traded on margin, most of whom were retailers, lost an average of $ 900,000 a day.
“Short sellers are Korea’s Axis of Evil,” said Jung Eui-jung, chief executive of the Korea Stockholders Alliance, who evokes the phrase famous by US President George W. Bush. Jung’s organization is lobbying the South Korean government to permanently ban short-selling if it cannot find a way to make the practice “fair” to retail investors.
It is unclear whether policymakers would ever go that far. Previous market-wide bans on short selling, during the global financial crisis of 2008 and the European debt crisis of 2011, lasted only a few months at a time, although restrictions on bank stocks remained in place for years.
In 2016, a lawmaker from the ruling party tried to ban short selling of shares in the Kosdaq index startup, but failed. And in 2018, after Goldman Sachs Group Inc. used to be fined 7.5 billion won ($ 6.7 million) for so-called naked short selling, investors rushed to support petitions calling for a ban on short selling, but the number of signatures never reached current levels.
For now, lawmakers are discussing a plan to maintain the ban place until June. They are also working on legislation that will tighten penalties for naked short selling – where investors place a bearish bet without first borrowing shares – and better align short-selling rules for retail and institutional investors.
“Some Koreans do not understand the mechanism of short selling and disagree with the practice of selling something he or she does not own,” said Lee Hyo-Seob, research fellow at the Korea Capital Market Institute. “It doesn’t help that the fines imposed on institutional investors who trade insider information or manipulate stock markets through short selling are so weak.”
(Updates the number of people who signed a petition in the third paragraph)