On Nov. 6, the first day of the complete ban on short selling, the KOSDAQ market witnessed 164.9 billion won (US$125.69 million) worth of short sales. Among these transactions, a remarkable 99 percent consisted of hedges by the Liquidity Providers (LPs) for exchange-traded funds (ETFs). As individuals began selling their ETF holdings, the short selling by LPs increased.
According to the Korea Exchange (KRX) on Nov. 7, the short-selling transaction amount on the KOSDAQ market recorded 164.9 billion won on the previous day, with a total transaction volume of 4,812,084 shares. While the transaction amount decreased by 39.93 percent compared to Oct. 3, the transaction volume increased by approximately 9.98 percent.
The reason for the increased trading volume despite the ban on short selling is that market makers and LPs are allowed to engage in short selling as an exception. On Nov. 5, financial authorities stated, “If there is no concern of disrupting market stability, borrowing short selling is allowed as an exception to the ban.”
However, 99 percent of the short selling transactions on the previous day were hedges by LPs supplying liquidity to ETFs. According to the KRX, out of the 164.9 billion won, 164 billion won was related to short selling of ETFs.
LPs are required to create buy and sell orders for ETFs to facilitate smooth trading. In this context, from the perspective of an LP submitting a buy order for an ETF, they engage in hedge transactions to secure short positions in the underlying assets related to the ETF.
In other words, the increased trading volume of short selling on the KOSDAQ market was a result of individual investors selling their ETF holdings due to the overall market surge that occurred the previous day.
A representative from the KRX explained, “As individuals sold a significant amount of ETFs, LPs engaged in a higher volume of short selling to provide liquidity for the ETFs. The short sales targeted the stocks included in the ETFs,” and further noted, “With a substantial number of ETFs consisting of KOSDAQ stocks, more short selling occurred on the KOSDAQ.”
Indeed, the net selling amount of ETFs by individual investors on the previous day amounted to 357.6 billion won. Considering that the total net selling amount for the entire securities market was 936 billion won, it’s evident that approximately one-third of the selling occurred in ETFs.