Protesters rally to urge the South Korean government to ban short selling near the Seoul Government Complex on Wednesday. (Yonhap)
Tension in South Korea’s financial market escalated Tuesday over groups of retail investors vowing to defend themselves in battles with short sellers here if the government moves to lift a temporary ban on the negative betting system next month.
The Korea Stockholders Alliance, which represents around 22,000 retail investors, has launched a monthlong protest, threatening to wage an all-out war against short sellers, claiming that foreign and institutional investors benefit the most while small investors suffer from plunging shares. South Korea has around 7 million small share traders, they added.
If necessary, the alliance said, it will open a Korean version of “WallStreetBets” -- an online community that rallied users for an epic war against large Wall Street investors to drive up GameStop’s stock price.
“To prevent unfair stock trading, the ban on short selling should be extended to one (more) year in South Korea. A system sorting out naked short sales should be introduced before resuming the activities,” its statement read.
The action reflects a fear growing among amateur stock investors -- who have become a new powerful, yet immature force in the market -- over the plan of reactivating short selling trades.
Short selling is a strategy of borrowing, selling and repurchasing stocks to return to the lender, betting the share price will drop. The practice can be used to raise liquidity and boost stock prices in a sluggish market.
Expressing concerns over the possibility of retail investors taking a concerted action, Vice Finance Minister Kim Yong-beom vowed to keep an eye on the repercussions such collective action could incur.
“The situation surrounding some stocks such as GameStop in the US stock market last week is a representative example of how market volatility increases from collective actions taken by market participants,” Kim said during a macroeconomic and financial policy meeting held Tuesday.
GameStop’s stock price rose by as much as 1,700 percent in January as retail investors on the Reddit forum WallStreetBets joined forces to lift the video game retailer’s struggling stock in partial retaliation against hedge funds that had bet on the company’s fall. As a result, trading of the stock was halted several times in the last week due to volatility.
“In the digital transaction environment in which numerous market participants easily can access investment information on a real-time basis, such collective action can appear frequently,“ Kim said.
Such movement jitters the Financial Services Commission, the nation’s top financial regulator which has already made it official that it aims to lift the ban next month, as scheduled.
In an apparent attempt to fend off market concerns, the FSC reportedly asked 10 brokerage firms to add a stock lending feature to their respective system by June to expand retail investors’ access to short selling.
Along with the new system, a revision to the Capital Market Act that aimed to make punishment more stringent for those who engage in illegal naked short selling will come into effect on April 6.
Given that those measures will be implemented after March 15 -- the expiration of the ban -- market watchers say that the government may consider extending the restriction for at least another three months.
Political pressure from the ruling party to maintain the ban to tackle the discontent of voters ahead of the by-elections to take place on April 7 is another factor that could lead the FSC toward extending the ban.
By Park Han-na & Jie Ye-eun