South Korea’s top financial regulator said Wednesday that it has decided to extend a temporary ban on short selling until May 2, amid growing pressure from retail investors voicing concerns over possible damages in battles with sophisticated hedge funds. The ban was previously set to end March 15. 

The Financial Services Commission will then implement a partial reactivation of short selling from May 3, while establishing a stock loan system in the meantime, which enables retail investors to have better access to stock borrowing for short selling. 

“Under the envisioned measure, only large-cap stocks listed on the benchmark Kospi 200 and Kosdaq 150 are allowed for short selling practices. Whether to resume short selling of the remaining shares on other indexes will be confirmed later on after reviewing market conditions,” said FSC Chairman Eun Sung-soo during a press conference.

“The FSC reached a conclusion that it is undesirable to ban short selling indefinitely considering that the trading technique has become a global standard in recent years.” 

In March last year, the Financial Services Commission had imposed a six-month ban on short selling by institutional and foreign investors in a move to bring stability to the local stock market hit by the COVID-19 pandemic, which was extended for another six months in August in the wake of the virus resurgence. 

At that time, the FSC vowed to resume short selling as early as March this year after setting up a system that increases retail investors’ access to short selling and that closely monitors related irregularities. 

Short selling is a trading tactic whereby investors immediately sell borrowed stocks on the belief that share prices will fall, allowing them to later repurchase the stocks to return them to the lender. The short sellers profit by buying the stock back at a price lower than it had previously sold it for.

The authority’s latest decision came amid retail investors’ growing calls for an outright ban on short selling, claiming the trading tactic creates an uneven playing field, as institutional and foreign investors have greater access to information and the capital needed to profit from falls in stock prices.

Starting Monday, a group of individual investors opposing resumption of short selling has been driving a bus painted with messages like “I hate short selling” around Seoul, which they say they will continue until March.

In addition, more than 200,000 people had signed an online petition on the Cheong Wa Dae website last month calling for financial authorities to permanently bar short selling.

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