Seoul’s additional short-sale regulation raises doubts over effect on easing volatility

2022.08.01 15:33:08 | 2022.08.01 16:06:08

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South Korea has unveiled measures to better level the playing field for retail investors in short selling, but whether the additional regulatory action can prevent volatility from excess shorting is in doubt by stock traders and experts.

The government last week said it would be enhancing guidelines on the temporary short-selling ban for preventing overheating.

When a stock price falls more than 5 percent from an excess shorting position and if shorting amount stretches by more than 6 times the average, the practice becomes suspended on the following day on the Kospi market.

From August, the suspension is triggered when shorting position takes up more than 30 percent of the stock trade turnover and causes the stock price to fall 3 percent or more, and when shorting turnover becomes twice bigger than average. The ban is extended for another day if the stock price falls more than 5 percent despite the short-selling suspension.

Shorting selling is a stock trading strategy where investors seek to profit by borrowing shares in anticipation of a fall in the price of the stock and then return the shares by buying them cheaper. Although the trading practice is legitimate, it has been accused of driving Korean shares down greater compared to other emerging markets.

Whether the expansion of the time-off guideline can curtail shorting, however, is uncertain.

Suspension can have an immediate effect but cannot reverse the investment trend in a certain stock.

The share of shorting versus total trade turnover of 21 Kospi stocks classified as “overheated” short stocks fell 5 percent on average on the day the stocks were placed on the suspension list, Maeil Business Newspaper found based on the Korea Exchange data.

For example, shorting on Emart was suspended on May 19 after shorting ratio hit 26.4 percent of total turnover on the previous day with turnover at 11.1 billion won ($8 million). On May 20, shorting value slimmed to 500 million won and the ratio to 2.5 percent. But the stock price has lost 16.6 percent since May.

Vidente, a broadcasting equipment maker trading on the Kosdaq, was declared excessively shorted stock on June 27, just two days after shorting on the stock was banned as such trading increased regardless of the suspension.

By Park Yoon-ye and Cho Jeehyun

[ⓒ Pulse by Maeil Business Newspaper &, All rights reserved]