By Anshuman Daga
SINGAPORE- South Korea’s short-selling mess risks further damage to the country’s $1.9 trillion stock market. The government says it will only lift a ban on the practice once it fixes the problem of so-called naked illegal trades. Yet that jars with a broader push to unlock shareholder value.
The sudden blanket ban on short-selling was only meant to last until the end of June. The heavy-handed decision in November came in response to the Financial Supervisory Service uncovering violations by foreign and institutional investors betting against securities they do not own. Last week, President Yoon Suk Yeol’s office dashed hopes of a resumption until a new electronic transaction system to detect unlawful trading was up and running. That could take about one more year.
The problem looks overblown. Naked short-selling, which involves selling shares without borrowing them first and is illegal in most countries, made up just 0.001 percent of the total value of Korean shares traded over the past two years, Bloomberg reported in January. Critics have accused the government of pandering to the country’s growing base of domestic retail investors, which accounted for a whopping 65 percent of transaction volumes on the stock market last year; many attribute short-selling for volatile share price declines.
The uncertainty will hurt Korea Inc. The governor of the Financial Supervisory Service, Lee Bok-hyun, had earlier signaled that the ban might be partially lifted, or, at the very least, investors would get a timeline on when and under what conditions it would be eased. Yet with neither happening, institutional investors unable to hedge their positions will probably stay away. The restriction will also hamper Seoul’s efforts to convince index provider MSCI to upgrade the country to a developed market status.
