Hahm Yong-il, senior deputy governor at the Financial Supervisory Service (FSS), speaks to reporters about the results of an investigation into the illegal short selling practices of global investment banks at the FSS' headquarters in Seoul, Monday. Yonhap

The government's short selling ban is expected to be prolonged until next year, according to experts on Wednesday. It may become the longest in history.

As the full-scale investigation into global investment banks uncovers a series of violations, the government's promise to resume short selling by July has become unlikely.

Moreover, the launch of a computerized system designed to prevent illegal short selling practices is not expected until at least the first half of next year.

"Although the Korean government has not formally made a decision on whether to further extend the timeline, we believe that there is a higher probability that this temporary ban on short selling stocks could be extended further to until the second quarter of 2025," said Douglas Kim, an analyst at Smartkarma, a Singapore-based investment research firm.

The recent disclosure by the Financial Supervisory Services (FSS) has put the brakes on the lifting of the ban.

On Monday, the FSS announced that the combined amount of illegal short selling conducted by nine of the 14 global investment banks is estimated to have been worth around 211.2 billion won ($154.7 million). Investigations are also ongoing for the remaining five banks, which could increase this amount.

Last November, financial authorities announced a complete ban on short selling until the end of June following their discovery of rampant naked short selling practices by global investment banks.

Naked short selling, which is illegal in Korea, refers to selling stocks without actually borrowing or owning those shares.

The financial authorities' plan to develop a computerized system designed to prevent the illegal practice, known as the Naked Short Selling Detection System, is expected to require a significant amount of time as well, according to experts.

The first step in the process involves computerizing all order processing for institutional investors and blocking unleveraged short selling orders. The second step includes the implementation of a centralized system to block any unfiltered short selling orders that are not caught in the first step.

"It will take nearly a year to complete the centralized system," Kim said.

Delays in necessary legal amendments are also burdening the implementations.

Financial authorities plan to amend the Capital Markets Act to provide a legal basis for institutions to share information on short selling balances with the Korea Exchange. However, the passage of the amendment seems daunting due to ongoing disputes between the ruling and opposition parties.

If the government delays the resumption of short selling until the system is fully developed, the ban would become the longest on record. The previous halt on short selling started in 2020 due to COVID-19 and lasted for 14 months.

"The government could allow short selling in July. But this would mean that the appropriate computer systems including the Naked Short Selling Detection System will not be in place and there are credible arguments that this may not be in the best interest of the local financial markets," Kim said.