Biggest rally since 2020 in South Korea after short-selling...

Biggest rally since 2020 in South Korea after short-selling ban



South Korean stocks soared on Monday after the country imposed a complete ban on short-selling. The controversial move was deemed necessary by regulators to stop the illegal use of this trading tactic, which is regularly used by hedge funds and other investors around the world.




The nearly eight-month ban could help appease retail investors who have complained about the impact of short-selling - the selling of borrowed shares by institutional investors - in the run-up to the April election, market watchers told Bloomberg. However, the move could lead to foreign funds pulling out of the US$1.7 trillion stock market. It could also hamper South Korea's efforts to gain developed nation status in MSCI's indices.


The benchmark Kospi index ended the day up 5.7 percent, its biggest gain since March 2020, amid a sharp rise in trading volumes. International investors were big buyers on a net basis, suggesting that funds have unwound short positions. Stocks that have seen increased short selling recently - including LG Energy Solution and Posco Future - contributed the most to the rise in the benchmark index. The small-cap index Kosdaq rose by 7.3

The Financial Services Commission declared on Sunday that new short positions in shares of the Kospi 200 Index and the Kosdaq 150 Index are prohibited from Monday until the end of June 2024. The decision has no impact on existing positions.

"This policy U-turn on short selling is not justified at this stage," said Wongmo Kang, analyst at Exome Asset Management. "Many people see this as a political move aimed at next year's general election," he said, adding that the Korean market tends to be "heavily influenced by retail investors".

South Korea is due to hold general elections for the National Assembly in April, and public perception of short-selling in the country remains very negative.



Sunday's announcement came just days after the Financial Supervisory Service (FSS) said it was planning a comprehensive investigation into short selling by global investment banks to crack down on uncovered short selling, which is illegal in South Korea. In early October, the FSS proposed imposing record fines on two global banks that had "routinely and intentionally" engaged in naked short selling. In the so-called "naked" variant of trading, shares are sold short without borrowing them first.

In 2023, the Kospi is currently up almost twelve percent compared to the MSCI Asia Pacific Index, which is up 2.6 percent. On Monday, the Kospi's trading volume was 70 percent higher than the average of the past ten sessions, according to NH Investment.

"It is possible for investors to lose confidence in the Korean market and miss opportunities," said Kang of Exome Asset. "If investors don't have the opportunity to voice their opinion that markets and individual stocks are 'mispriced', stock markets will lose credibility on the world stage in the long run."