South Korea’s top financial regulators and sole market operator on Wednesday unveiled plans to tighten their control on short-selling in stock markets, a practice widely vilified here.

Starting September, Korea will be able to put a brake on short-selling of a certain stock for a day, if short-selling of stocks that have fallen more than 5 percent take up 18 percent -- tighter by 2 percentage points -- of the daily trade volume, while the volume of short-selling on that stock rose sixfold compared to the average of the previous 40 trading days.

On the secondary Kosdaq market, the daily short-selling ban would be in place if over 12 percent of trade volume – down from the current 15 percent -- was short-selling, and the short-selling is five times the average for the previous two months.

If a stock drops between 10 percent a day on either market, the short-selling will be restricted the next day regardless of the short-selling’s proportion to the entire stock trading.

Moreover, from the fourth quarter, a short-seller would be subject to harsher fines no matter whether the practice was intended, depending on how frequent an investor short-sold.

Since its introduction in March this year, the ban was implemented five times on the main bourse and six times on the secondary market

Under a strengthened system, the Financial Services Commission anticipated that the frequency would rise to once a week on the Kospi market and once a day on the Kosdaq.

Korean individual stock traders, as well as financial authorities, have long been hostile to short-selling, blaming it for stock market disruption.

“Short-selling in Korean markets does more harm than good,” Park Min-woo, director at Capital Market Bureau of the FSC said in a press conference Wednesday. “More short-selling would undermine investors’ market confidence in Korea.”

A proposed revision of the Financial Investment Services and Capital Markets Act to punish a short seller for any activities to induce a stock price drop is pending as of Wednesday.

By Son Ji-hyoung (consnow@heraldcorp.com)