● Extension of the short selling ban period…

What is short selling?



The Financial Services Commission has extended the ban on short selling until May 2nd.

From the 3rd, the next day, only the stocks of the KOSPI 200 and KOSDAQ 150 indexes can be traded, not all stocks.

They showed their willingness to withhold the'full allowance' until a system was in place that would dispel investors' concerns.



I will try to solve the process of short selling (空賣渡) in an easy-to-understand manner.

There are three main actors in the short selling process.

① It is a place to lend stock, ② a place to borrow stock, and ③ Korea Exchange.

First, ② borrows 10,000 shares (1 billion won) of Company A from ①.

After that,'short selling' is executed through ③.

It is throwing 10,000 shares (1 billion won) of Company A's stock into the stock market.

When the sale suddenly spills into the market, feared investors join the process of selling, and the value of 10,000 shares of Company A becomes 500 million won.



Now it is the turn of ②.

Since we have already made 1 billion won by selling 10,000 shares, we will invest only half of the profits to buy 10,000 shares (500 million won) of Company A again.

This process is called buy-back, often referred to as'short covering'.

In conclusion, although the number of shares in Company A of ② has not changed to 10,000 shares, it has earned 500 million won.

This is because after selling the stock for 1 billion, when the stock price fell, it was bought back at 500 million.

Now ② comfortably gives back 10,000 stocks borrowed from ①.

Of course, you pay a commission in exchange for borrowing stock.



"We have excluded'Deposit and Settlement Office' and'Securities Company', which mediate transactions between ① and ② for better understanding."




In the meantime, individual investors have argued that the so-called'short selling force' lowers the stock price of a specific company, and in the process, the true value of the company has been distorted.

In fact, some stocks with a concentration of'short selling' have caused damage to many individual investors as stock prices have repeatedly fluctuated.




● What is the power of short selling?



Did the short selling forces always win?

Before answering this question, we need to first discuss the'probability of success' for short selling.

Short selling forces are at greater risk than expected.

This is because in theory the loss can be infinitely large.

To do that, the simplest buying and selling, you need to explain the buying and selling behavior.



Investor A buys 100,000 shares (KRW 1 billion) of Company B.

At this time, the maximum loss of A is KRW 1 billion.

This is because when the company B closes, only 100,000 shares (1 billion won) will be scrapped.



Let's assume that investor A made a short sale this time.

As in the previous case, we sell 100,000 shares of Company B (1 billion KRW) short.

But suddenly, the stock of Company B starts to skyrocket.

100,000 shares become 2 billion won, and after another week, it is now 3 billion won.

In the meantime, the time to pay off the stocks borrowed by A is approaching, and there is no choice but to buy the stocks of Company B with a loss of 2 billion won in the form of'eating mustard while crying'.




Of course, Company B's stocks will not rise endlessly, but compared to the buying behavior that simply blows the principal, you have to take a greater risk.

Representatively, Tesla short-selling investors lost 44 trillion won last year, and Apple and Amazon's short-selling investors lost 7.4 and 6.4 trillion won, respectively.

The hedge fund had to suffer a loss of 15 trillion won in the short-selling war over the US'GameStop' stock, which has recently emerged as a symbol of the'anti-short selling movement'.



Last year, the British FCA said, "No evidence was found that short selling caused the recent decline in stock prices," and the US SEC also said in a media interview that "short selling has no plans to enforce a ban because it promotes general trading." Has made a position.



However, there are other opinions.

The short selling forces intentionally distort the stock price by leaking'bad news'.

In fact, a lot of similar things are happening in the United States, and there are cases in our stock market that go beyond'reasonable doubt'.



According to a paper recently published by Dr. Eun-ah Lim and Professor Jeon Sang-kyung of Hanyang University, the size of short-selling transactions is about half of the amount of credit transactions, but the average daily profit is about 1.27 billion won, which is the average daily profit for credit transactions (3,182). It was about 39 times more than 10,000 won).



● The level of punishment for illegal short selling in Korea is weaker than in the US?



Some private investors who argue for'abolition of short selling' claim that the penalties for illegal short selling are generous.

According to the Korea Exchange, the Capital Markets Act was amended at the end of last year, making it possible to impose criminal penalties such as fines within the amount of the order and imprisonment for more than one year for those who made illegal short sales.

Although it is stated as'one year or more', the Korean Exchange explains that under the Criminal Law, abandoned imprisonment can be imposed for up to 30 years, so it is a higher level of punishment than the United States, where imprisonment for up to 20 years is possible.



Even in the case of a penalty penalty, the entire order amount is imposed as a limit, so if the amount of an illegal short sale order is KRW 1 billion, regardless of profit or not, a penalty fee of up to KRW 1 billion can be imposed.




● Only Korea does not have a'no-borrowed short selling' pre-blocking system?



'Non-borrowing short selling' is an act of trading stocks that have not been borrowed, which is illegal in Korea.

This is a method in which an investor does not borrow stocks, but tricks the Korean Exchange to trade with'no stock'.

In 2017 and 2018, Goldman Sachs ran ``no borrowing short sale'' twice, and then gave a ridiculous explanation of ``employee's mistake'' and criticized it.

The'Samsung Electronics Ghost Stock' case also revealed the lack of a'no-borrowed short selling' blocking system.



The Korea Exchange explains that "There is no country with a system that prevents illegal short selling in real time."

This is why the cost of building the system and the cost-effectiveness are low.



In response to these issues, the Financial Services Commission announced that it plans to shorten the detection cycle of unborrowed short sales from six months to one month, and strengthen post detection and surveillance of illegal short sales.

However, there are still many voices that a system for preemptive blocking of non-borrowing short selling should be in place.



● Is the abolition of short selling the answer?...

"To improve the old system"



paradoxical short selling provides an opportunity to earn money to private investors.

This is because there are many opportunities to make money in a bear market rather than a bull market.

If the market is constantly rising, it will be difficult for new investors to enter.

Also, if only those who actually own stocks can trade, stock prices can bubble.



The liquidity supply problem is also a must.

A healthy investment environment can be created when money goes not just to buy, but also to sell markets.

In particular, small and mid-cap stocks, not large stocks, do not have a lot of trading volume, so the inflow of foreign capital can be positive for the stock price flow.

Currently, Korea's market cap is ranked 10th in the world.

Not only us, but all of the top 10 countries allow short selling.



System needs to be improved.

The most problematic part of the controversy over the abolition of short selling is the'demand system'.

This is because the short selling quantity is determined by hand rather than using a specific system in the process of borrowing stocks.

This is why it is difficult to be able to verify in real time and mutually verify the'short sale quantity' between the borrower, the lender, and the Korea Exchange.

So, if you forget, the problem of'no borrowing short selling' is popping up.



This time, the Financial Services Commission came up with alternatives such as strengthening the constant monitoring system and establishing a computer system.

However, the anxiety of individual investors who have been exposed to the damage of'illegal short selling' remains.