Priya Patel
TLDR:
- South Korea’s financial regulator has found $41 million worth of illegal short selling on domestic stocks by two global investment banks.
- The banks breached rules by conducting naked short selling, the practice of selling shares without borrowing them first.
South Korea’s financial regulator, the Financial Supervisory Service (FSS), has announced that it has uncovered $41 million worth of illegal short selling on domestic stocks by two global investment banks. The FSS will impose penalties on the banks, although their identities have not been disclosed. The banks allegedly engaged in naked short selling, a practice that involves selling shares without borrowing them first. This is a violation of South Korea’s regulations, as naked short selling has been illegal in the country. The FSS’s findings come as it expands its investigation into past short-selling trades conducted by ten global investment banks. The FSS will collaborate with the Securities and Futures Commission of Hong Kong in its investigations.
The crackdown on short selling in South Korea has been met with mixed reactions. Some domestic retail investors support the ban on short selling, blaming short sellers, primarily foreign investors, for stock price downturns. They believe the ban will restore market fairness. However, others view the ban as politically motivated, as it was introduced shortly before parliamentary elections in April, sparking accusations that it was an attempt to win votes.
The FSS’s investigation revealed that one of the banks repeatedly overstated the number of borrowed shares in two Korean stocks in its system. The bank failed to detect this before issuing sell orders based on the inflated figure. The other bank over-counted the number of shares it owned in three Korean stocks and sold based on the overstated figure, resulting in naked short selling. The FSS will take enforcement action against these banks.
This crackdown on short selling in South Korea reflects a broader trend of tightening regulations on this trading strategy worldwide. Short selling has long been a contentious practice, with proponents arguing that it provides liquidity to the markets and can serve as a check on overvalued stocks, while critics claim that it can lead to market manipulation and exacerbate market downturns. As regulators continue to investigate and crack down on illegal short selling, the debate over its benefits and drawbacks is likely to persist.
The FSS’s action against these two global banks sends a strong message that illegal short selling will not be tolerated in South Korea. By imposing penalties and collaborating with international regulators, the FSS is aiming to ensure market integrity and protect retail investors. As the investigations into short-selling activities continue, it remains to be seen whether further illegal practices will be uncovered and what additional action will be taken to address them.
