South Korea to Remove Short Selling Ban, Implementing New Safeguards Against Market Manipulation
After an unprecedented 18-month suspension, South Korea is set to allow short selling for all listed stocks starting on March 31, 2025. This marks a significant shift from the ban imposed in March 2020. Despite the extended suspension, the ban did not have the desired effect on stock prices. While the KOSPI index saw an 11.35% increase during the ban period from November 2023 to March 2025, the KOSDAQ index experienced a 7.28% decline. This underperformance was noticeable compared to the S&P 500, which surged by 30% over the same period.
Financial experts like Shin Min Seop, an analyst at DS Investment Securities, pointed out that the ban did not help support share prices as expected. Instead, the return of short selling should be viewed positively as a means to facilitate more rational price discovery in the market. With diverse investor participation, competitive companies can increase their value.
Research showed that there was no clear correlation between short selling restrictions and stock performance in the market. Among the top 10 stocks with the highest short interest before the ban, six stocks witnessed declines while four registered increases. For instance, Hotel Shilla, with the highest short interest at 7.64%, plummeted by over 40% during the ban period.
To address concerns regarding market manipulation, South Korea’s financial regulators have introduced new safeguards. These include standardizing the loan period for short selling to 90 days and establishing uniform collateral requirements at 105% cash for both institutional and retail investors. Hefty penalties for illegal naked short selling have been implemented to deter violations, with fines reaching up to six times the illegal profits and potential life imprisonment for violating amounts exceeding 5 billion won.
A new central monitoring system (NSDS) has been launched to prevent naked short selling. Lee Bok-hyun, the head of the Financial Supervisory Service, expressed confidence in the system’s ability to prevent 99% of past violations based on simulation data. The re-implementation of short selling may aid South Korea in achieving inclusion in MSCI’s developed market index, a goal hindered by the previous ban.
However, some analysts have expressed concerns that the stricter regulations surrounding short selling may hinder market efficiency. While increased oversight could reduce volatility and improve retail investor sentiment, it may also impact liquidity and price discovery negatively. Notably, South Korea now boasts some of the most stringent short selling regulations compared to other major markets.
Historical data from past resumptions of short selling, such as in 2008, 2011, and 2020, showed that initial market volatility typically stabilizes within a month. Regulators will closely monitor heavily shorted stocks in the first two months after the resumption to ensure compliance with the new regulations.
The decision to lift the ban follows a comprehensive investigation into illegal short selling by global investment banks. This investigation resulted in fines amounting to 83.6 billion won for 13 out of the 14 firms inspected. The violations were linked to inadequate independent trading unit operations and arbitrary interpretations of stock borrowing agreements.
