Photographer: SeongJoon Cho / Bloomberg
Photographer: SeongJoon Cho / Bloomberg
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Retail investors pushed to see stocks rise have come to life miserable for short sellers around the world.
In South Korea, the government is also accumulating.
Lawmakers overseeing the country’s $ 2 trillion stock market are debating plans to extend one of the world’s longest-selling bans on short-term selling amid pressure from mom and popular bettors pushing more than two-thirds of daily trade.
Calls are increasing to make the ten-month ban permanent. More than 202,000 people have signed a petition urging President Moon Jae-in to make short sales illegal, crossing a 200,000 threshold that forces him to give an official response. Moon’s prime minister has already done so he called the practice “undesirable.”
While much of the financial world has been seeing all the changes in the struggle between retail investors and short sellers GameStop Corp., South Korea, has quietly become a major battleground in the debate over and over again about the role of bearish trades in stock markets.
Retail Frenzy
With the increasing daily trading of the pandemic, individual investors have outperformed institutions and foreigners in the Korean stock market
Source: According to Koscom Corp., which provides financial data for the Korea Exchange
With national elections scheduled for early next year, Seoul’s political leaders are resisting angering thousands of Koreans who have fallen in love with trade actions during the pandemic. The head of a Korean retail investor advocacy group has called the short-term sale “bad” and has organized a protesting the practice outside government buildings. Meanwhile, the International Monetary Fund has urged South Korea to end its ban on short-term selling, saying it runs the risk of making the market less efficient and harder to hedge.
“Given that financial conditions in Korea and the functioning of the market after the Covid outbreak have stabilized, we believe that the necessary conditions exist to restore this short-term selling practice,” said Andreas Bauer, a fund official. virtual press conference on the Korean economy on Thursday.
Like other countries, South Korea saw its stock market crash in March intensify the pandemic. Stock prices fell three days after the entry into force of the short sale ban, helped by a flood of central bank liquidity and retail buying. The country’s Kospi benchmark ended 2020 with a 31% increase, the world’s best performance after Nigeria’s own resource meter. Kospi has risen another 6.8% so far this year.
Although other markets, including France and Italy, also instituted short-term sales bans at the same time, South Korea is now the only country other than Indonesia that has maintained the restriction.
Research work extensively covered by local media has helped fuel popular anger toward short sellers. Authorized by professors at Hanyang University in Seoul, it showed that short sellers in Korea – mostly foreign investors – earned an average daily profit of $ 2 million between 2016 and 2019. Investors who traded on margin, most of them who were retail bettors, lost an average of $ 900,000 a day.
“Short sellers are the Axis of Korea’s Evil,” said Jung Eui-jung, chief executive of the Korean Shareholders’ Alliance, citing the phrase famous for U.S. President George W. Bush. Jung’s organization is pressuring the South Korean government to ban short selling permanently if it does not find a way to make the practice “fair” for retail investors.
It is unclear whether policymakers would ever go that far. Pre-market bans on short-term sales, during the global financial crisis of 2008 and the European debt crisis of 2011, lasted only a few months, although restrictions on banking actions remained in place for several years.
In 2016, a ruling party lawmaker tried to ban the short-term sale of shares of the initial Kosdaq index, but failed. And in 2018, after Goldman Sachs Group Inc. with a fine of 7.5 billion won ($ 6.7 million) for the so-called naked short sale, investors rushed to support the petitions to call for a ban on short-term sales, but the number of signatures never did not reach current levels.
At the moment, lawmakers are discussing a plan to maintain the ban place until June. They are also working on legislation that will toughen the penalties on bare short selling, in which investors execute a bearish bet without having previously asked for shares, and will help short selling rules for retail and institutional investors.
“Some Koreans do not understand the mechanism of short selling and do not agree with the practice of selling something that she or he does not own,” said Lee Hyo-Seob, a researcher at the Korea Capital Market Institute. “It doesn’t help that the fines imposed on institutional investors who operate with inside information or manipulate the stock markets through short-term selling are so weak.”
(Update the number of people who signed a petition in the third paragraph)