SEOUL: South Korean stocks surged Monday after authorities imposed an eight-month ban on short selling, with officials citing “illegal shorting practices” by global investors as driving the move.
Financial regulators announced the ban Sunday, saying “fair trading ground was no longer possible” because of investment banks’ “unfair trading practices”.
Short selling involves traders borrowing securities to sell in hopes of buying them back at a cheaper price later.
Officials judged that “illegal shorting practices pose a risk to the stability of the market and fair pricing”, Kim Joo-hyun, chairman of the Financial Services Commission, said at a news briefing.
“We have decided to suspend short trading until the end of the first half of next year,” Kim added.
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The benchmark Kospi rallied more than four percent Monday, while the small-cap Kosdaq was up almost six percent.
A decision on whether to reinstate short selling in July will be made after a review of improvements in the market, Kim added.
The FSC chief said there would be a thorough probe into global investment banks to see whether they have carried out any illegal short selling, warning of “stern punishment”.
Around 10 global investment banks, which account for the “significant portion of short selling”, would be under scrutiny, regulators said.
But critics say the ban is “excessive” and question whether political motivations were behind the move, which comes ahead of parliamentary elections next year.
“An outright ban of legitimate short selling is an excessive regulation,” said the Maeil Business newspaper in an editorial.
“It is suspicious that the FSC had succumbed to the pressure from the ruling party that tries to win retailer investors’ votes.”
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