The public movement to ban short selling on the South Korean market in an attempt to prevent recurrence of what happened at Samsung Securities Co. now leads to the demand to relieve the requirement for short selling by individual investors. This is to make the market fair by allowing individual investors to short sell if it is impossible to ban short selling. Due to the complexity of the process, the vast majority of short-sellers have been institutional and foreign investors so far.
According to the main bourse operator Korea Exchange (KRX) on April 13, the daily average transactions of short selling by institutional investors on the main Kospi bourse this year surged more than 40 percent from that on the bull market in the second half of last year. The volume of short sale transactions by institutional investors stood at 2,412,359 shares a day on average from January 1 to April 12 this year, up a whopping 43.94 percent from 1,675,908 shares in the second half of last year. The figure was more than double 17.96 percent of the growth of the daily average transactions of short selling by individual investors from 40,569 shares to 47,856 shares over the same period. This is largely due to the fact that institutional investors increased the short sale transactions as the Kospi index was adjusted in February by “inflation shock” caused by the U.S.
On the other hand, individual investors didn’t increase the percentage of short selling because of real-world constraints rather than different outlook for the market. Individuals are also able to short sell by utilizing lending securities of securities companies. However, only a few individual investors are making use of it because there are too many constraints, such as company, volume and period. The volume of short sale transactions by foreign investors on the Kospi rose 12.24 percent this year compared to the second half of last year, which was lower than that by individual investors. However, the figure is not comparable as the absolute volume itself is much higher.
By the volume of short sale transactions alone, instead of the rate of increase, we can see that the stock lending market on the local bourse strictly revolve around institutional and foreign investors. Comparing the daily average volume of short sale transactions on the Kospi as of the 12th, foreign and institutional investors short sold 7,511,606 shares and 2,412,359 shares, respectively, while individual investors short sold 47,856 shares. In short, individuals made short sale transactions only once when foreigners and institutions did 150 times and 50 times, respectively. Considering the fact that short selling is more favorable to the bear market than the bull market, institutional and foreign investors raked in a profit through a rapid sale during the adjustment this year but individual investors couldn’t help but remain an idle onlooker.
The individual-centered Kosdaq market is not so different when it comes to the volume of short sale transactions as foreign and institutional investors account for most of them. The daily average volume of short sale transactions by individual investors on the Kosdaq market came to 66,395 shares as of April 12 this year, which was only 0.8 percent and 6.4 percent compared to 7,441,511 shares of foreign investors and 1,032,352 shares of institutional investors. With simple calculation, individual investors short sold once on the Kosdaq when foreign investors made short sale transactions 110 times and institutional investors 15 times. The figures are not so different from the Kospi market but the two markets have something in common that short selling is just for big investors.
Accordingly, the public movement is turning to lesser restrictions on the requirement of individual investors as the financial authorities show their negative stance against the ban on short selling. Individual investors believe that the volume of their short sale transactions will increase when the number of companies for lending securities increases and the period for lending securities is extended. However, short selling is directly connected to credit due to the characteristics of its transaction. This is why this is something that the financial authorities cannot simply say yes as individual investors can go bankrupt and securities companies that lent securities can be hit hard when the price of relevant companies’ stocks crashes.
An official from the securities industry said, “Short selling is banned to individual investors even in the United States and Japan, which are considered to have more advanced financial markets than South Korea. But, the government can start discussing how to relieve restrictions on short selling on condition that investors have the responsibility of investment.”
Meanwhile, the daily average volume of short sale transactions of Samsung Securities, which caused the dividend fiasco on the 6th, doesn’t go down. The figure recorded at 126,291 shares, which accounts for 8.1 percent of the total transactions. The ratio hit the highest after April 6.