Short selling, a speculative stock investment technique, has come under the spotlight in the financial market as a pharmaceutical-oriented company CEO recently argued that the firm’s shares were hit by foreign speculators.

The Financial Supervisory Service and the Korea Exchange launched their review as to whether there is an urgent necessity to issue a ban on short selling of “each company’s shares.”

A short-selling investor seeks short-term gains by issuing “sell” orders with borrowed stocks: The investor does not actually own the stocks and only borrows them via brokers after paying lending fees. The investor later purchases the stocks when the prices fall.

Financial authorities had sometimes restricted short selling of entire companies’ stocks on the main bourse Korea Exchange and the secondary KOSDAQ. Or they banned the trading for a specific industrial sector if necessary.

Now ― the FSS and Korea Exchange are starting joint research into whether to adopt a policy issuing a ban on short selling of a particular company’s shares once the speculative trading ratio reaches an excessive level.

But some analysts cast worries, saying that enhanced restriction could shrink overall investor sentiment and undermine the principle of developed capital market-oriented economy.

“The local stock market has been suffering a relatively bearish situation compared to global bourses due to the sagging economy,” an analyst said. “Enhanced regulations will cause critical deterioration.”

He stressed that financial regulators should crack down on not the overall speculative investment but stock manipulation via illegal trading.

On Tuesday, Celltrion chairman Seo Jung-jin said that he was tired of the short-selling attacks from parties such as hedge funds, arguing that regulators have been “negligent” in oversight of them over the past two years.

He has claimed that some groups have been spreading false rumors to bring down Celltrion’s stock price and profit through short selling.

Short selling of Celltrion shares on the KOSDAQ market has increased sharply for the past two years.

In 2011, the Financial Services Commission, the decision-making entity of the FSS, pushed forward a comprehensive revision for laws on the capital market and financial investments, to pave the way for Korea’s large asset management companies to handle hedge fund operations.

According to the Korea Financial Investment Association, aside from foreign hedge funds, more than 10 “Korean-style” hedge funds have made their historic debut since late 2011.

Unlike ordinary funds, a hedge fund is specialized to aim at high-investment returns via risky bets. It utilizes a variety of investment techniques, such as short selling and leveraged buyouts.

By Kim Yon-se (kys@heraldcorp.com)