Nov 08, 2023

South Korea’s KOSPI index has dropped over 2% after authorities initiated a short-selling ban.

KOSPI-chartKOSPI – Weekly Chart

The KOSPI is still holding the weekly support from the 2022 lows. It is still too early to determine a selling pattern.

The market likely rose on Monday due to short-sellers pulling their positions, and the rest of the week will show how traders see the new order.

The Financial Services Commission’s order to ban new short-selling positions on stocks in the Kospi 200 Index and Kosdaq 150 Index to the end of June 2024 left many investors surprised, while some say outright bans make the market less transparent and, therefore, less attractive to investors.

The first reaction was a sharp buying action, with the Kospi up 5.7% for the best day since March 2020. However, Huh Jae-Hwan, an analyst at Eugene Investment & Securities, said it was an unusual move as authorities are comprehensively prohibiting short selling at a time when there is no apparent risk.

As Bloomberg said, South Korea also banned short selling during the Global Financial Crisis 2008, amid the euro-zone debt crisis and the US sovereign downgrade in 2011, and then again during the pandemic in 2020.

“There is a possibility that international investors may lose trust and opportunities in the Korean market,” said Wongmo Kang at Exome Asset Management. 

“Without the ability for investors to express a view that markets and individual stocks are ‘mispriced’ to the upside, stock markets lose long-term credibility on the world stage.” 

This led to the market plunging overnight, with futures down 7% at one stage and regulators applying a halt to program selling.  

“The ban may boost prices of a few specific stocks for a few days, but over the longer haul it will increase overall price volatility, reduce market liquidity, and make pricing less efficient,” said Hyosung Kwon, an economist at Bloomberg. 

“Even worse, it could discourage investment and further deepen the discount on South Korea’s stocks, hurting the retail investors it was supposed to protect.” 

The KOSPI may be volatile while the new rules settle with investors.

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