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| President-elect Yoon Suk-yeol speaks during a conference at an industrial cluster in Gwangju, located about 330 kilometers south of Seoul, April 20. Joint Press Corps-Yonhap |
Lackluster stock market has little to do with short-selling: experts
By Lee Min-hyung
With President-elect Yoon Suk-yeol ready to reinforce the monitoring of short-selling shares, retail investors are stepping up their calls for the incoming administration to impose tighter regulations on the trading practice carried out by institutional and foreign investors.
These complaints reflect the effects of the months-long lackluster stock market performances here. The benchmark KOSPI and secondary KOSDAQ have been on a downward trajectory after reaching historic highs last year.
As the local stock market is faced with multiple external risk factors such as possibly drastic rate hikes from the U.S. Fed, the sentiment of fear has been escalating, particularly among retail investors, that the stock markets may lose further ground. They also reiterated the need for the incoming Yoon administration to keep a closer watch on any illegal and unfair short-selling by institutional and foreign investors.
Yoon has also pledged to introduce a series of measures to win back trust from the market in a way to strengthen surveillance and punishment against those showing signs of engaging in manipulative trading acts.
Market experts, however, said that any regulatory movement by the incoming administration would have a limited impact in helping rev up the sluggish stock market performances.
"The argument that the short-selling of shares has driven the decline of stocks is far from the truth," Hwang Sei-woon, a senior research fellow at the Korea Capital Market Institute, said. "A key factor determining the ups and downs of the stock market is the change in corporate fundamentals, so the ongoing stock market decline has little to do with the short-selling."
Yoon's pledges on the stock market include the introduction of a circuit breaker for short-selling. The plan was designed to protect more investors by halting the trading of shares when the stock market shows any dramatic drop. Even if this plan is feared to weaken investor sentiment on shorting here, the regulation is widely expected to play a role in safeguarding retail investors.
The incoming administration also shared its plans to establish a special organization solely dedicated to monitoring any suspicious short-selling acts in the local stock market.
"Most of these pledges are aimed at protecting the market from any illegal acts surrounding short-selling, thereby regaining trust from investors and the market," the expert said. "But the measures are not designed to boost the market. The stock market will be revitalized when listed firms enhance their earnings and improve fundamentals."
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| A member from the Korea Stockholders Alliance gives their request for the short-selling regulation to an official of the presidential transition committee in Seoul, April 4. Yonhap |
As short-selling is a trading practice that bets on a stock price declining, the total short-selling volume on the main bourse reached a new high, for the past five years, during the first quarter of 2022, amid prevalent pessimism toward stocks from emerging markets. The short-selling transaction volume reached 29.95 trillion won during the same period, the highest since the Korea Exchange started compiling the quarterly figure in May 2017.
After the stock market enjoyed a bullish run in the second quarter of 2021, the figure has been on a gradual rise.
The rise in short-selling occurred in the aftermath of widening external uncertainties sparked by the Fed's key rate hikes and Russia's invasion of Ukraine.
The outlook for the stock market in the second quarter remains less optimistic than before, as investors will likely prefer to purchase safer assets during this period of monetary tightening. If the Fed pushes ahead with a major rate hike of 50 basis points in May, this hike will affect the Bank of Korea's future monetary policies and may speed up the pace of the rate hike here as well.
Another market expert at Yuanta Securities also said that short-selling does not drive any fundamental changes in the future course of the market.
"Short-selling, in itself, is not a critical factor affecting the ups and downs of the market, as its trading volume is not big enough (when compared with the total transaction volume)," Kim Kwang-hyun, an analyst at the securities firm, said. "Investors have a tendency to use short-selling to hedge risks in a bear market, rather than preemptively betting on stock prices to fall."
Short-selling in Korea was the most active between March 7 and 14 in the first quarter of this year. The short-selling transactions amounted to a daily average of 748.5 billion won during the period, and this figure accounted for only 6 percent of the total stock transactions here.
The KOSPI has hovered at around the 2,700-point mark this year, showing no meaningful signs of a rebound amid the aforementioned external uncertainties. The secondary stock market has also failed to reach the symbolic 1,000-point mark this year.
The Yoon administration will also be in a growing dilemma over how to appease complaints from retail investors at this time when the government is hoping to reach "developed market" status from Morgan Stanley Capital International (MSCI).
For now, the nation's financial regulator has yet to completely lift a ban on the short-selling of listed shares hereafter issuing the temporary suspension in March 2020, due to the stock market crash at the start of the pandemic. In May 2021, the authority only partially lifted the ban, allowing investors to engage in short-selling on the KOSPI 200 and KOSDAQ 150.
As MSCI wants Korea to enable the full resumption of short-selling to obtain developed market status, the general view is that the incoming administration will lift the ban completely at some point, potentially as early as the first half of this year.
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