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Regulator should ensure level playing field for all players
A heated debate is underway on whether to lift a ban on short selling, which has been in place temporarily to stabilize the stock market. On March 15 last year, the financial authorities banned short selling for six months amid mounting concerns about a market collapse due to the adverse effects of COVID-19 on the economy. In August, the authorities extended the ban for another six months. According to that schedule, they are supposed to lift the ban on March 16 this year, but have yet to decide on the matter as they are faced with vehement opposition from retail investors, which has triggering the controversy.
Short selling is an investment or trading strategy that bets on the decline in the price of a stock or other types of securities. It is an advanced technique that is usually favored by experienced traders and investors. If implemented appropriately, the system has positive functions and is necessary for the local bourse to keep abreast of the markets in advanced countries. If the financial regulator puts off lifting the ban, it will raise doubts about policy consistency and erode trust in Korea's capital markets.
Retail investors' concerns and skepticism over a resumption of short selling are understandable, because foreign and institutional investors have been its main beneficiaries based on their overwhelming funding capability and access to information. Many individual investors have perceived short selling as creating an uneven playing field. Foreign and institutional investors have even engaged in various unfair trading practices by intentionally pulling down share prices to achieve short-selling gains. They have even employed naked short selling, an illicit scheme without borrowing any shares. However, the authorities rarely ferreted out such irregularities, while violators who were nabbed usually ended up receiving only a slap on the wrist.
The Financial Services Commission (FSC) has vowed to supplement the system before lifting its ban by, for instance, slapping harsher penalties on violators and expanding individual investors' access to short selling. We think the FSC is going in the right direction. Short selling can stabilize the market through a push-and-pull interaction and prevent manipulators from unduly inflating stock prices. Regrettably, some politicians are condemning the system in the run-up to mayoral by-elections in April. The FSC and related agencies need to fix defects in the current system and allow short selling to resume as scheduled. Most of all, a level playing field must be ensured for all players. If not, the resumption will backfire.
