Amid the accelerating volatility of South Korea’s stock market, discontent is brewing over foreign investors, accused of being responsible with their rampant short selling.
Short sellers, either institutional investors or foreign investors here, place bets on stocks that they think would fall in value. They sell borrowed shares in companies, and later repurchase them at lower prices to profit, which is called short covering.
A trader watch monitors at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, March 20, 2020. (Yonhap)
Short selling is often criticized for causing excessive price swings and larger losses across financial markets. And some market watchers here claim short selling has added fuel to sharp sell-offs of stocks caused by the deadly virus that has claimed 13,063 lives, with 308,297 cases confirmed globally as of March 23.
“Short sellers make larger profits when the market is in a downtrend, so the scheme can accelerate stock market drops,” an industry official said.
It is not the first time that foreign short sellers have faced controversy here.
After being given full access to the domestic stock market in May, 1998 at the request of the International Monetary Fund, foreign investors were first allowed to short sell stocks in July 1998.
Since then, shorting transactions on the main bourse Kospi and secondary Kosdaq have dramatically increased to reach 103.5 trillion won ($81 billion) in 2019. Of the total, foreign investors accounted for 62.8 percent.
Some critics have long called for restricting short selling, and the financial authorities have recently adopted a six-month temporary ban as the coronavirus is wreaking havoc on the entire economy.
Some critics said, however, banning short selling is not a silver bullet, as it does not necessarily help boost plunging stock exchanges like before.
Although shorting was banned temporarily on Oct. 1, 2008, the Kospi index kept sliding down to 938.75 on Oct. 24. Since the ban was implemented, the main bourse fell more than 30 percent in six months while Kosdaq dropped by some 40 percent.
Short selling has its own positive effects as well, according to market experts.
“Short selling can help improve efficiency in the market and provide sufficient liquidity,” said an official from a stock trading firm. “Only illegal shorting should be rooted out.”
Naked short selling, which allows investors to sell shares that they do not actually own, for example, is banned in the nation. However, an increasing number of foreign investors have been caught violating the rule. From 2010 to 2019, the number of traders slapped with penalties for illegal shorting reached 101, and 94 of them were foreign investors.
Market watchers pointed out the growing discontent also reflects the vulnerability of the domestic market where a majority are individual investors.
Retail investors accounted for 67.6 percent of stock transactions in 2018 while foreign and institutional traders made up 18.4 percent and 14 percent, respectively. Individual investors on the Kosdaq, in particular, accounted for 85 percent.
In contrast, the figure of retail investors stands at 17.1 percent and 10.3 percent in Japan and Hong Kong, respectively -- meaning they are less affected by shot selling schemes.
By Kim Young-won (firstname.lastname@example.org)