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South Korea Bans Short Selling: Implications and Market Response

Source: Financial Services Commission (FSC)

Seoul, South Korea - The Financial Services Commission (FSC) justified the ban by citing increased volatility in South Korean stocks and recent discoveries of systematic naked short selling by institutions. It claims this has distorted prices.

South Korea's financial regulator announced that it will ban all short selling in the domestic stock market from Nov. 6, 2023, to June 30, 2024. 

Why It Matters:

South Korea has banned short selling in its stock markets until mid-2024 amid allegations of manipulation. 

The move could affect liquidity and pricing. In addition, the policy would be an obstacle to including the South Korean stock market in MSCI indexes.

The Key Points

  • The Financial Services Commission (FSC) said the move is aimed at curbing volatility and addressing concerns about potential market manipulation.
  • Critics argue that the ban could reduce market efficiency and liquidity. Proponents say it will protect retail investors.
  • Short selling allows investors to profit when stock prices fall. It involves borrowing shares, selling them, and repurchasing them to return to the lender. Naked short selling refers to selling shares short without first agreeing to borrow them.
  • The FSC justified the temporary ban by citing increased turbulence in South Korean stocks relative to global peers. It also noted recent discoveries of large-scale naked short selling by foreign institutions and banks, which the regulator said distorted market pricing.

What they say:

"The temporary ban on short selling in South Korea is aimed at stabilizing our markets during a volatile global economy,"

said FSC Chairman Kim Joo-hyun.

"We will use this time to reform short-selling regulations."

What's next:

The short-selling ban will take effect on November 6, 2023. It will apply to all stocks listed on the KOSPI, KOSDAQ, and KONEX stock exchanges.

During the ban, the FSC plans to revise short-selling rules and penalties. The changes will be developed through discussions with experts, lawmakers, and the public. The ban will last until June 30, 2024.