[ANALYSIS] Despite short-selling restarts, stock markets stand strong

One month has passed since short-selling of local stocks 메이저토토 was partially resumed in early May, following a more-than-year-long temporary ban on the system amid the COVID-19 pandemic. The resumption that took place starting May 3 was not a complete measure ― only large cap companies stocks on the main KOSPI 200 and tech-heavy KOSDAQ 150 indices were subject to short-selling.

Despite retail investors' resentment over the resumption, the market reaction generally wasn't that severe. In contrast to the markets' bearish moves on the first day of the resumption, during the past month they performed as usual ― the KOSPI even hit an all-time high of 3,255.90, May 10, just a week after the restart of short-selling.

The local stock markets didn't seem to be much affected by short-selling, a system largely used by foreign or institutional investors.

According to the Korea Exchange (KRX), short-selling transactions on the KOSPI from May 3 to May 28 totaled at 9.34 trillion won ($8.43 billion), of which foreign investors made up 85.95 percent, engaging in short-selling worth 8.03 trillion won. Local institutional investors were involved in 12.46 percent worth 1.16 trillion won, while retail investors accounted for just 148 billion won, or 1.58 percent.

The pattern was similar on the tech-heavy Kosdaq. Total short-selling transactions stood at 2.32 trillion won during May with foreign investors accounting for 83.21 percent, or 1.93 trillion won. Local institutional investors accounted for 341 billion won, or 14.65 percent, while retail investors logged just 49.6 billion won, or 2.13 percent.

Samsung Electronics was the number one company subject to short-selling, as 611.7 billion won was bet against the rise of its shares amid the imbalance of semiconductor supply and demand. The share price, however, stayed quite strong finishing at 80,600 won at Tuesday's close, only a 1.3 percent drop from 81,700 won logged May 3.

HMM, or Hyundai Merchant Marine, was the second-most short sold company with over 391 billion won bet against the global shipping company. Despite the short-selling calls, the company's share price finished at 47,650 won at Tuesday's close ― a 28 percent hike from 36,950 won, May 3.

LG Chem, the third most short-sold company with 361 billion won in related transactions, saw its share price finish at 825,000 won, a 9 percent fall from 907,000 won. LG Chem was only one of four companies on the top ten most short-sold company list that saw its price fall during the past month.

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The remaining six companies, including Celltrion, Hyundai Motors, Kakao and Samsung Biologics, saw their stock prices rise.

Market experts explain that short-selling could cause a stock price rise due to short covering ― referring to buying back borrowed securities in order to finish a short position.

"When there's a large short-selling transactional amount against a company's shares, it faces huge selling pressure from the market. However, when a company's shares fare well enough with a limited range fall in the price despite the short-sellers' downward pressure, it can be seen that market liquidity resolved the short-selling transactions," Jung In-ji, an analyst at Yuanta Securities Korea, explained, adding that short-selling transactions can also be seen as a potential purchasing force due to the possibility of short covering.

Other experts point out that short-selling only accounted for about 5 percent of all stock transactions, so it would have a limited impact on the market. During the past month, short-selling positions made up around 5 percent to 6 percent, lower than the annual average of 8 percent from March 2019 to March 2020.

Unlevel playing field persists

Despite its rather limited impact on Korean stock markets, criticism of the system still remains, particularly about differences in the short-selling systems for retail and institutional investors.

Firstly, there's a large difference in terms of borrowing period. Retail investors only have a maximum of 60 days per transaction, while institutional and foreign investors can prolong the period for almost an unlimited period, although they have to instantly return borrowed stocks if the lenders demand it. However, given that transactions are made on the same markets, some argue that the terms should be identical.

"As institutional and foreign investors' short-selling could actually be prolonged for an almost unlimited time with a few exceptions, they can just wait until stock prices fall," an association of retail stock investors here said in a statement.

Borrowing fees as well as required secured loan rates are also different for retail and institutional investors, making foreign institutional investors easily opt for short-selling on Korean stock markets, the association argued.

A dealer works next to monitors at the headquarters of Hana Bank in central Seoul in early May. Yonhap

Meanwhile, the KRX stressed that its supervisory committee was closely monitoring short-selling transactions, particularly by foreign institutional investors, to see whether there were any illegal practices, such as naked short-selling.

The KRX and Financial Services Commission (FSC), the country's financial regulator, conducted inspections to oversee short-selling at some local branches of global financial companies, Tuesday, in order to ensure the system followed local regulations.

"Since the partial resumption of short-selling last month, we haven't witnessed excessive panic or irregular symptoms in the market so far," an FSC official who participated in the inspection said.