A man walks past an electronic board at the Korea Exchange in Seoul, Wednesday. Yonhap

The short selling ban in Korea might be prolonged, as President Yoon Suk Yeol emphasized that the ban is not merely a "temporary measure for the general elections."

Previously, financial authorities stated that they would put their utmost efforts into improving the system by this June, and then decide whether to resume short selling afterward.

During a town hall meeting held at the Korea Exchange last week, Yoon said that he has no intention "to lift the short selling ban unless effective measures to prevent the adverse side effects are established," adding that it is not a temporary measure just for the general elections.

His remarks have increased uncertainty over when short selling might resume.

Adding to this decision is the recent series of illegal short selling activities detected among foreign investment banks (IBs). Following the exposure of significant illegal short selling by global IBs, including BNP Paribas and HSBC last October, two more global IBs have been recently implicated in illegal short selling, involving sums of around 50 billion won ($37.8 million).

As Yoon mentioned the need for measures to prevent "adverse side effects" before any resumption of short selling, a key issue now appears to be the effectiveness of the real-time surveillance system demanded by individual investors.

"We are demanding the implementation of a system that allows for a real-time monitoring of stock balances, even if it can not completely block naked short selling," said Jung Eui-jung, head of the Korean Stockholders' Alliance, during a public hearing held at the Korea Exchange (KRX) last December.

Members of the Korean Stockholders' Alliance urge for the establishment of real-time monitoring system on short selling in front of the ruling People Power Party's headquarters in Seoul, a day after the government prohibited short-selling temporarily, in this November 2023 photo. Yonhap

However, relevant institutions have raised concerns, stating that it is difficult for third parties, such as brokerage firms or stock exchanges, to ascertain the respective available balances of foreign and institutional investors for selling in real time.

As a practical alternative, a task force, which was launched last November to combat naked short selling, has proposed mandating foreign and institutional investors to establish their own internal balance management systems. Brokerage firms would then be required to regularly inspect the implementation of these systems.

Twenty-one foreign and 78 domestic institutional investors are targeted for the establishment of this system. Their combined transactions in short selling account for more than 90 percent of the total.

The team is preparing to make an interim announcement soon regarding the establishment of the monitoring system.

"Given the president's request for effective measures, I assume that the task force team is feeling mounting pressure. They will have to include something meaningful in their announcement," an industry official said.

However, some anticipate that prolonging the short selling ban might prove difficult. International media have already expressed negative views, and the likelihood of foreign investors exiting the domestic stock market is increasing.

"Amid a downward trend in domestic stock indices resulting from the withdrawal of foreign investors, the ongoing short selling ban might further adversely affect their investment sentiments," another industry official said.