South Korea Bans Short Selling Ahead of Upcoming Election

• South Korea has banned short-selling until at least June 2024.
• Shares in South Korea rose Monday morning, with the country’s benchmark Kospi gaining 4%.
• The reason for the ban is to appease retail investors by curbing unfair trading practices.

South Korea has banned short-selling until at least June 2024. According to multiple reports, the reason for the ban is to appease retail investors by curbing unfair trading practices and also to prepare for the upcoming election.

Following the ban, shares in South Korea rose Monday morning, with the country’s benchmark Kospi gaining 4%, while LG Energy Solution, a battery company, jumped by over 20%. Similarly, Posco Future M, a battery materials company, rose by 28%, while the technology-focused Kosdaq index gained 6%.

According to reports, the ban would last until June 2024 and applies to all stocks listed in South Korea. Kim Joo-hyun, chairman of South Korea’s Financial Service Commission (FSC), said on Sunday that despite previous regulatory improvements, concerns remain high over fair price formation in the domestic stock market due to repeated illegal naked short selling by global institutional investors.

Joo-hyun noted that the commission will use the period of the ban to improve regulations on short selling, as well as investigate the activities of global institutional investors who engage in “naked” short selling. 

“We will apply a zero-tolerance approach to illegal naked short-selling practices, and perpetrators will be strictly punished and face criminal prosecution,” he said.

With the recent ban, the FSC has reversed its 2021 decision to lift short-selling restrictions on the Kospi 200 and Kosdaq 150 stocks. Those restrictions were imposed during the Covid-19 pandemic to shore up the stock market.

An Hyung-jin, Chief Executive of Billionfold Asset Management, said the recent decision by the FSC came as a surprise. According to him, most people expected the regulator to lift the ban on short selling altogether as part of Seoul’s longstanding campaign to be upgraded by leading index providers to developed market status.

Kospi’s rise reflects a slight recovery for the stock, which fell almost 15% between August and October due to persistent high-interest rates in the US.