South Korean stocks soar after govt bans short-selling

Investing.com-- South Korea’s KOSPI index surged over 4% on Monday after the government reimposed a ban on short-selling shares in a bid to level the playing field for retail and institutional investors. 

The KOSPI jumped 4.4% to a near one-month high, and was also headed for its best day in nearly four years. 

The South Korean government had so far only allowed traders to short shares of companies with a large market capitalization. Short-selling is the practice of selling borrowed shares and buying them back at a lower level, while profiting from the price difference. 

The ban on short-selling will be in place until June 2024, and was described as a means to target supposedly “unfair trades” carried out by large institutional investors, which leaves retail traders to foot the bill.

The Financial Services Commission (FSC), which imposed the ban, also cited global economic uncertainty- stemming from the Israel-Hamas conflict, as well as economic weakness in South Korea- as the motivators behind the ban. 

“During the period of banning short selling, the government will work on proactive measures to improve the system in a way that will help to root out illegal short selling activities when short selling resumes thereafter,” the FSC said in an announcement over the weekend. 

“Between retail investors and institutional investors, the playing field still remains not leveled, and the authorities will actively seek measures that will effectively address this problem.” 

The ban also comes just a few weeks after South Korea’s Financial Supervisory Service imposed record-high fines on two Hong Kong-based investment banks for allegedly engaging in naked short-selling. 

Naked short-selling is the practice of shorting shares which may not actually exist, and can lead to scenarios where the short pressure on a stock exceeds its total float. The practice is banned in South Korea and most major financial markets, especially after the 2008 crisis. 

Even earlier in the year, South Korean regulators had fined five other foreign firms for naked short-selling.