South Korean Stocks Jump After Regulator Bans Short Selling

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(Bloomberg) — South Korean stocks surged after regulators reimposed a full ban on short-selling for about eight months, a controversial move that authorities said was needed to stop illegal use of a trading tactic deployed regularly by hedge funds and other investors around the world.

The benchmark Kospi jumped as much as 2.7%, leading gains among regional gauges in Asia early Monday. Stocks that had seen recent jumps in short-selling positions, including LG Energy Solution Ltd. and Posco Future M Co., were among the biggest boosts. The small-cap Kosdaq Index rose as much as 4.4%. 

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The nation’s Financial Services Commission said on Sunday that new short-selling positions will be prohibited for equities on the Kospi 200 Index and Kosdaq 150 Index from Monday through the end of June 2024. Pandemic-era restrictions on the selling of borrowed shares had been lifted for those two gauges only in May 2021, while the ban has remained in place for some 2,000 stocks.

READ: South Korea to Ban Short-Selling of Stocks Until June 2024

The move comes ahead of general elections in April for the National Assembly in South Korea, where public perception of short-selling remains deeply negative. Some ruling party lawmakers urged the government to temporarily end stock short-selling in response to demands by retail investors, who have staged protests against the practice. Most short-selling in South Korea is conducted by institutional investors.

The latest ban is “unusual” as authorities are comprehensively prohibiting short selling at a time when there is no financial crisis, said Huh Jae-Hwan, an analyst at Eugene Investment & Securities.

The Kospi surged earlier this year on frenzied buying of electric-vehicle battery names and chip stocks related to the artificial intelligence theme. Concerns over geopolitical tensions and high interest rates reversed the rally in recent months, driving the benchmark into a technical correction and nearly erasing its gain for the year.

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The financial regulator said the market had been disrupted due to “massive” naked short-selling by global investment banks. The so-called “naked” variety of the trade involves shorting shares without even borrowing them first. The regulator said it is now seeking to make improvements to create a level playing field for retail investors, with stronger punishments for traders who break the rules.

READ: Korea to Fine Banks for Naked Shorts; Local Media Name HSBC, BNP

While regulator’s argue that naked short-selling inhibits fair price formation and hurts confidence, some observers say broad outright bans make the market less transparent and therefore less attractive. Some say the restrictions may keep the market from being upgraded to developed status from emerging by index provider MSCI Inc.

“It does compromise their status and certainly would hold them back from achieving developed market status,” said Gary Dugan, chief investment officer at Dalma Capital Management Ltd. “Given that there is an immediate ban there will be an initial sharp move higher in stock prices of companies that have had some short selling,” but the impact may be limited given low levels of short positions in the overall market, he said.

—With assistance from Abhishek Vishnoi.

(An earlier version of this story was corrected to show the ban was partially lifted in May 2021)

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