Goldman Sachs, a global investment bank that has been suspected of carrying out naked short selling, has been found to have attempted to short sell 350 KOSPI and KOSDAQ stocks on the day of short selling. This means that the short sale volume of a single foreign brokerage is large enough to negatively affect the entire Korean stock market.
According to the financial industry on June 10, the Seoul branch of Goldman Sachs placed short selling orders for a total of 350 KOSPI and KOSDAQ stocks on May 30. Financial authorities estimate the entire short selling volume at over 10 million shares, taking into consideration the fact that Goldman Sachs did not settle transactions of 1,387,968 shares of 20 companies until the settlement deadline (June 1) and that short selling quantities by company were different. This volume nearly equals the daily trading volume of a stock whose trade increases sharply.
Goldman Sachs's short selling volume on May 30 was nearly four times larger than the volume of Samsung Electronics shares shorted on that day. Of course, the total volume of Goldman Sachs’s short selling is not easy to estimate because prices of stocks differ.
An inspection team of the Financial Supervisory Service (FSS) has been examining the amount of shares shorted by Goldman Sachs. Considering that the amount of unsettled transactions reached six billion won (US$5.4 million), which was unprecedentedly large compared to previous short selling cases, the total amount of Goldman Sachs’s short selling scheme may reach one trillion won (US$900 million). Although financial authorities lifted restrictions on individual investors' short selling, more and more stock market experts say that the lift is quite insufficient to correct the unfair situation.
Even among experts as well as individual investors, there are growing calls that regulations on borrowing of stocks for short selling and supervision on brokerages should be strengthened.
Financial authorities say that it is impossible to abolish the short selling system as it is a global trading technique and has positive functions, such as preventing long-term declines of overly evaluated stocks through short-term adjustments.
However, the responsibility to check whether or not short selling is carried out as prescribed falls entirely on brokerage firms, which merely executes transactions at the request of their customers. Accordingly, brokerages are not active about checking whether or not there are unfair practices in short selling.
The Financial Services Commission (FSC) has recently presented a set of measures to improve the stock trading system. Designed to strengthen brokerages’ responsibility in executing transactions, the measures require them to separate ordinary selling and short sales, check with consignors and depository trust companies when they encounter abnormal orders, and demand, if necessary, for the submission of compliance commitment. The FSC came up with the plan as it has perceived the current trading system has many loopholes. According to the FSC, brokerage firms in Japan and Hong Kong are responsible to make sure that the transactions they make are free from problems.
However, some experts point out that securities companies will be unable to handle everything from checking borrowing to checking compliance with laws. In fact, the Korea Exchange has had no examination and supervision cases related to the violation of regulations on short selling and abnormal transactions over the past one year.
It is also a problem that a punishment for naked short selling is merely a slap on the wrist. If it is found that Goldman Sachs International committed naked short selling, they may be fined up to 100 million won (US$90,000). But since Goldman Sachs International is not a financial company but an investment company, it is impossible for Korean financial authorities to punish those related to the short selling or employees of Goldman Sachs International.