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Korea to tighten grip on short-selling

Short-selling in Korean stock markets is widely vilified and picked as the culprit behind market disruption

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.

(Yonhap)
(Yonhap)
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)
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