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Short Selling Surges Before Block Deals, MSCI Korea Index Rebalancing
Suspicions of Information Leaks Growing
Short Selling Surges Before Block Deals, MSCI Korea Index Rebalancing
  • By Yoon Young-sil
  • May 23, 2019, 14:04
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Short sellers are taking advantage of block deals and rebalancing of the Morgan Stanley Capital International (MSCI) Korea index.

Short sellers are taking advantage of block deals and the inclusion of certain stocks in the Morgan Stanley Capital International (MSCI) Korea index.

Recently, shorting on Celltrion Healthcare Co. surged before a block deal carried out by One Equity Partners, the company’s second largest shareholder. The spike in shorting fueled distrust in the Korean stock market as suspicions have risen that undisclosed information about the deal had been leaked. Market participants demand that the government investigate the suspicions and come up with measures to prevent information leakage.

One Equity Partners carried out demand forecasting to sell 6.50 million shares of Celltrion Healthcare through a block deal after the stock market closed on May 20. However, shorting on the stock increased before the news about the block deal was released, raising the possibility that “undisclosed information” was leaked. Short selling accounted for 36.6 percent of the stock’s transactions on May 22, with the value of shorting transactions reaching 12 billion won (US$10.07 million). Due to intensive shorting, Celltrion Healthcare’s stock price dropped 3.4 percent from the previous trading day and then 9.65 percent the next day. Short sellers earned a profit as much as stock prices fell.

This is not the first time that short selling increased before a block deal. On Oct. 22 last year, Temasek Holdings conducted demand forecasting to sell off part of its stake in Celltrion Holdings through a block deal. The ratio of short selling to the total transactions of Celltrion shares remained in the 20 percent to 40 percent range from Oct. 1 to 22.

Short selling also increases when a certain stock is included in the MSCI Korea Index. When a stock is newly added to the benchmark index, its price goes up as passive funds, which follow the index, will purchase it.

Recently, Meritz Fire & Marine Insurance Co. has become the target. The firm’s short sale ratio increased after some securities companies released a report in November last year that the insurer is highly likely to be included in the MSCI Korea Index. Its short sale ratio recorded 35.83 percent on May 20. In short, one third of the total transactions came from shorting.

LG Uplus Corp. also saw its stock massively shorted before it was included in the MSCI Korea Index again. The shorting volume came to 3,833,437 shares on Aug. 31 last year, a day before it was added to the MSCI, with the value of the transactions reaching 59.98 billion won (US$50.32 million), a new record.

A certain stock’s exclusion from the MSCI Korea Index is also an opportunity for short sellers. There has speculation in the market from the beginning of this year that KT Corp. and DGB Financial Group could be excluded from the MSCI Korea Index in May. DGB Financial Group’s short selling ratio remained below 10 percent at the end of last year but it rose to 30 percent to 70 percent from March this year. On April 1, short selling accounted for 67.92 percent of the total transactions of the stock.

KT also showed a rapid growth in short sale from the end of March and recorded 40.04 percent on May 21. Indeed, MSCI decided to exclude KT and DGB Financial Group from its Korea index.