Financial Services Commission Chairman Eun Sung-soo on Friday pledged all-out efforts to establish a monitoring system to detect illegal short selling before the financial regulator allows the practice to resume in May. 

Short selling is a trading tactic whereby investors immediately sell borrowed stocks on a bet that share prices will fall, allowing them to later repurchase the stocks and return them to the lender. Some investors sell stocks without borrowing, known as “naked” short selling, which is currently illegal in the local capital market. 

“Retail investors have spoken against the rampant practice of illegal short selling and the uneven playing field (between them and institutional as well as foreign investors) in the market,” Eun said during a parliamentary interpellation session regarding the government’s policies. 

“Procedures are underway at the FSC to set up a real-time monitoring system that keeps track of local brokerages’ data processing to prevent illegal short selling attempts, which is expected to be in operation by the end of this month. Since there’s time until May 3 to fully prepare for the system, we will carry out a series of trial tests before then.”

Responding to mounting concerns over retail investors’ lack of access to short selling, the financial regulator was in talks with some local securities firms, the Korea Exchange and related market observers on ways to allow retail investors to borrow more shares from brokerages for short selling, Eun added. 

On Wednesday the financial authority announced that it was extending the current temporary ban on short selling until May 2. Starting May 3, short selling of Kospi 200 and Kosdaq 150 stocks will be permitted with some restrictions. The announcement drew mixed reactions from the market, with some favoring investor protection and others denouncing state intervention.

The FSC imposed a temporary ban on short selling in March last year to counter the market volatility triggered by the COVID-19 pandemic, as did other countries including Malaysia, Thailand, France, Spain, Italy and Belgium. With the ban having been in place for almost a year, South Korea is the country with the world’s longest-running restrictions on short sales, according to Bloomberg.

By Choi Jae-hee (cjh@heraldcorp.com)