South Korea blocks short selling on its stock exchanges. The index rebounds powerfully
South Korea's Financial Services Commission stunned markets on Sunday by announcing it would ban short selling of stocks until June 2024 to allow regulators to "actively" improve rules and systems, a move that analysts they called it “unusual” and “unjustified” given that, apparently, there is no real financial crisis.
Echoing various short-selling bans implemented in the United States during times of market turbulence, the commission announced that trading in borrowed shares will be banned for stocks in the Kospi 200 Index and Kosdaq 150 Index starting Monday until the end of June.
The Kospi index reacted with a strong rebound exceeding 5%
Kosdaq reacted with an even +7%.
“Amid the market turmoil, we uncovered massive illegal short selling by global investment banks and circumstances of further illegal activity,” Financial Services Commission Chairman Kim Joo-hyun said in a briefing. “It is a serious situation where illegal short selling undermines the formation of fair prices and damages market confidence.”
Lee Bokhyun, governor of the Financial Supervisory Service, told reporters that 10 global banks will face investigations into the matter, as they account for the majority of short-selling transactions in South Korea. A major blow to financial speculation.
During the ban, South Korea will seek “fundamental improvement” to level the playing field for retail investors in the coming months, including finding ways to narrow different short selling requirements and conditions between institutions and individual investors , Kim said. Authorities will also seek tougher penalties for illegal short selling activities. They will continue to scrutinize global banks' short-selling transactions with the introduction of a special investigative team on Monday.
South Korea began allowing short selling of stocks across the two indexes in May 2021, while keeping in place a pandemic-era ban on more than 2,000 stocks. Reintroducing a blanket ban on this widely used trading practice could hamper the nation's efforts to seek an improvement in a key global index, Smartkarma Holdings Pte said. analyst Brian Freitas.
“The ban on short selling will further jeopardize Korea's chances of moving from the emerging market to the developed market,” Freitas said. “Expect bubbles to form in pockets of the market favored by retail investors as short selling no longer acts as a brake on absurd valuations.” Short sales, long and short, have the logical purpose of allowing market trends to be signaled in advance.
Short selling represents a small portion of the nation's $1.7 trillion stock market: about 0.6% of the Kospi's market value and 1.6% of that of the Kosdaq, according to stock exchange data.
According to Bloomberg , the regulator's announcement comes ahead of general legislative elections to select members of the National Assembly in April. Some ruling party lawmakers have urged the government to temporarily end stock short selling in response to demands from Korean retail investors who have staged protests against the practice. They argue that short selling leads to unfair advantages for foreign and institutional investors.
South Korean President Yoon Suk Yeol and his party have campaigned on reforms, including changes to pensions and the prevention of market monopolies. Yoon's popularity has risen in recent months to a high of 34% on Friday, after declining last year.
The regulator's ban coincides with a nascent recovery in South Korea's main stock benchmark. The Kospi rose in November after suffering its worst monthly decline in October due to foreign sell-offs. The index is still down more than 10% from its August peak. The cut in short selling is also the government's way of showing that it cares about protecting retail operators, especially Korean ones.
At this point, South Korea becomes a primarily internal financial market, given that the speculative practices used by large international operators are expelled. This will obviously create discontent in the international financial press, but we must also ask ourselves whether the authorities should protect domestic savers or encourage international speculation.
In Italy we have chosen the second solution.
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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/la-corea-del-sud-blocca-le-vendite-allo-scoperto-sulle-proprie-borse-lindice-rimbalza-potentemente/ on Mon, 06 Nov 2023 10:00:41 +0000.