The Financial Services Commission (FSC) has announced that it will also explore the possibility of prohibiting short selling by market makers and liquidity providers, a move seemingly influenced by the resistance from some individual investors. There are concerns that trading difficulties and price volatility may arise for certain stocks if implemented.
During the plenary session of the National Assembly's Legislation and Judiciary Committee on Nov. 9, FSC Chief Kim Joo-hyun stated, "If we completely block short selling for market makers as well, I will once again consider what significance it has for investor protection and the development of our market," adding, "I will reconsider and examine what impact it may have." This comes after the recent prohibition of short selling for individual investors from the 6th, raising discussions on the possibility of extending the ban to market makers and liquidity providers.
This movement stems from the demands of individual investors. Market makers and liquidity providers facilitate smooth trading by placing buy and sell orders for underperforming stocks, receiving fees in return. Short selling frequently occurs in this process, often as a means to hedge the price fluctuation risk when making purchases. On the first day of the short-selling ban on Nov. 6, when there was a flood of sell orders for exchange-traded funds (ETFs), liquidity providers stepped in to buy the stocks to absorb the selling pressure, leading to short selling in the underlying assets of those ETFs. Individual investors argue that such short selling is a cause of stock price declines.
The problem lies in the fact that such claims are far from the truth. In cases like this, if market makers or liquidity providers do not absorb the sell orders, trading becomes difficult, and there is a significant risk of prices falling. Blocking their short selling practices may actually be detrimental to the interests of individual investors. Even institutions designated as market makers or liquidity providers are already prohibited from short selling for profit rather than liquidity provision.
The FSC is also signaling a cautious approach. Chairman Kim mentioned, "Market makers and liquidity providers play a role in adjusting liquidity in the market, forming the market in their own way, and protecting investors," adding, "For this reason, in the past, short selling bans were not applied to market makers and liquidity providers."