South Korea’s financial authorities said Friday they were weighing options to stem stock market volatility in response to growing concerns over foreign “hot money” that allegedly exaggerates the market’s moves.

The local regulators’ latest gesture to stabilize the local stock market came after they imposed a ban on short selling on Monday in a bid to prevent sharp falls in share prices. In the same vein, European regulators are discussing a ban on such transactions, with which investors aim to profit from price falls sparked by debt woes in Europe and the United States.

The Financial Services Commission, the country’s top financial regulator, is reviewing measures to prevent excessive swings in the local market by encouraging foreigners to invest in long-term instruments, officials said.

“Instead of tightening regulations, it is urgent to create a safety device that can counter foreigners’ excessive capital flows,” said an official. “We will look into several measures. Giving tax benefits is one idea.”

The idea of offering tax benefits for long-term investment funds has been floated by the Korea Financial Investment Association. The Finance Ministry and the FSS, however, are yet to clarify their position on such tax incentives.

The country’s financial market has been under stronger pressure in the past week, during which the key stock indexes faced enormous selling pressure touched off by sudden outflows of foreign capital following the unprecedented U.S. credit rating downgrade.

Analysts blame the recent swings on the local market’s relatively “open” system, a favorable condition for foreign funds who are allowed to quickly pack up and leave the market in times of trouble.

Korean regulators have made the local financial system more open to attract more foreign investors since the 1997-98 Asian financial crisis.

The dilemma for policymakers here is that it is increasingly difficult to keep stability in the market while still maintaining open and liberal polices.

The proposal to offer tax incentives, if adopted, will take the form of tax benefits for those who invest long-term. A tax benefit, the idea goes, will prompt more local investors to put their money into the stock market for an extended period, thereby propping up the market even when foreign investors suddenly withdraw funds from the Seoul bourse due to external factors.

Over the past week, Asian market have posted some of their steepest falls since 2008, and some politicians in the region blame hedge funds in Asia for contributing to volatility by dumping stocks.

By Yang Sung-jin (insight@heraldcorp.com)