Why South Korea banned short-selling before 2024 elections

South Korea will re-impose a ban on short-selling shares at least until June in an effort to promote a “level playing field” for retail and institutional investors, financial authorities in the country said. Back in May 2021, the ban was lifted for trades involving the shares of companies with large market capitalisation included in the KOSPI200 and KOSDAQ150 share price indices. The restriction has remained in place for most other stocks. Short-selling involves selling borrowed shares to buy back at a lower price and pocket the difference. “The measure is aimed at fundamentally easing ‘the tilted playing field’ between institutional and retail investors,” Financial Services Commission (FSC) Chairman Kim Joo-hyun told a news briefing. “Amid continued uncertainty in financial markets, major foreign investment banks have been engaged as a matter of practice in unfair trades … and we determined that it would be impossible to maintain fair trading discipline,” Kim said. The FSC will review market activity in June to decide whether there is significant improvement to allow the ban to be lifted, he said. The regulator last week said it would establish a team of investigators to probe short-selling by foreign investment banks for illegal activity including so-called naked short-selling. Naked short-selling – in which an investor short-sells shares without first borrowing them or determining they can be borrowed – is banned in South Korea. The Financial Supervisory Service in October said it would likely fine two Hong Kong-based investment banks it determined had engaged in naked short-selling transactions worth 40 billion won ($29.58 million) and 16 billion won respectively. Earlier in the year, the regulator fined five foreign firms including Credit Suisse for naked short-selling. Officials and market watchers alike have cited uncertainty around short-selling regulation as among factors needing to be resolved for influential index provider MSCI to upgrade South Korea to developed-market status.