The Financial Services Commission (FSC) announced on March 13 that short selling in the South Korean stock market would be banned until Sept. 15 this year. Nonetheless, short selling by institutional investors is continuing with Korea Exchange making an exception of liquidity suppliers and market makers, which are securities companies in most cases. On March 16, the first day of the ban, the short selling volume totaled 440.9 billion won, not much different from 449.8 billion won of the previous trading day.
Under the circumstances, more and more individual investors are calling for the abolition of short selling and market making. However, both the government and the FSC are against their demand and experts are also saying that market making is currently adopted with many positive functions in most advanced stock markets.
United Future Party floor leader Shim Jae-chul held a press conference on March 25 and brought the issue back to the surface by saying that the party would move ahead with short selling abolition. “Short selling has added uncertainties to the stock market, has led to the possibility of non-fulfillment of settlement, and can be misused for stock price manipulation,” he said.
The Korea Capital Market Institute, however, refuted his claim by saying, “Short selling abolition will do more harm than good and short selling and market making are necessary for liquidity enhancement.” It also mentioned that allowing individual investors to conduct short selling will make more sense than short selling abolition.
“Market makers increase the possibility of trading conclusion by continuously providing new asking prices in the absence of an appropriate asking price,” Korea Exchange explained, adding, “A ban on market making will lead to a further decline in market liquidity, which is already decreasing fast.”