Foreign Investors Going Almost Unpunished for Naked Short Selling

Democratic Party of Korea lawmaker Kim Byung-wook remarked on Oct. 12 that foreign institutions’ naked short selling in South Korea totaled 171.3 billion won and yet the penalty imposed on them stood at 8.9 billion won for the past four years.

According to the lawmaker, a total of 32 naked short selling restrictions were imposed from January 2017 to last month, including 31 targeting foreign financial companies and pension funds. The 31 are divided into three disciplinary warnings, 24 with penalties ranging from 7.5 million won to 72 million won and four with penalties ranging from 120 million won to about 7.5 billion won. The largest penalty was imposed on Goldman Sachs in 2018.
 

“At present, individual investors account for approximately 70 percent of the domestic stock market with foreign investors accounting for about 70 percent of short selling,” the lawmaker explained, adding, “The selling has been conducted by phone or chat unlike stock trading, which has led to individual investors’ discontent and distrust.” He also pointed out that foreign investors’ naked short selling, which represents 95 percent of the total, has gone almost unpunished.

In the period of 2010 to last month, the number of restrictions on foreign institutions’ naked short selling amounted to 105. The lawmaker recently tabled a bill so that the naked short selling penalty can be increased to up to 300 percent of derived profits or avoided losses and the penalty can be one billion won or less when the profits or losses cannot be calculated.

The Financial Services Commission, in the meantime, said that the financial authorities’ active intervention will entail its own problems although it is true that naked short selling is something that must be curbed in the interest of market transparency.