South Korean prosecutors would immediately embark on a criminal investigation on suspected illicit short-selling activity and seek to confiscate ill-gotten profit as a part of stricter actions on the investment strategy blamed to be speculative to cause greater volatility in the market upon an order by President Yoon Suk-yeol.

The announcement was made after a joint meeting of representatives of the Supreme Prosecutors’ Office, the Financial Supervisory Service and the Korea Exchange on Thursday upon President Yoon’s order that financial authorities and prosecutors should establish relevant measures to root out any illegal short sale.

Investors blame illegal stock shorting for market routs, and the Korean capital market cannot gain the trust of investors without addressing the issue, Yoon said on Wednesday.

Short selling is a globally used risk-hedging strategy where investors sell borrowed stocks in anticipation of a bearish market and buy back the stocks at lower prices to make profits. But retail investors have been complaining that the practice only benefits big institutional and foreign investors with more access to short selling, allowing them to exploit the market with price manipulation.

Several securities firms including Korea Investment & Securities and Shinhan Financial Investment were fined for violating the country’s short-selling rules.

Regulators at the meeting agreed that the authorities should take prompt actions to improve the country’s short-selling system and guidelines, while tightening their scrutiny and punishment against illegal short selling practices.

Under the proposed changes, a case would immediately go to the prosecution under a “fast-track” procedure instead of going through the usual review first by financial authorities to seek heavy penalty and seizure of ill-gotten profit.

Large-scale short sale on a specific stock must be reported to authorities. If the balance in shorting account exceeds 30 percent of the trade related to the targeted stock to cause a stock price fall of more than 3 percent, it would become designated “overheated” to trigger a temporary ban on the practice. The mandatory collateralized ceiling in retail account would be lowered to 120 percent of the borrowed stock from 140 percent.

By Kim Myung-hwan, Park In-hye and Minu Kim

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]