Korea Exchange lifts 'short selling ban' for market makers

Market makers resume short selling from the 2nd of this month

Exchange: "Short selling has no effect on the market"

It has been confirmed that since this month, the Korea Exchange has lifted its self-imposed 'short selling ban' on derivatives market makers from securities companies. With the resumption of short selling, which serves as a hedging tool for market makers, the related operations are said to have returned to normal. Short selling is a trading strategy where one borrows and sells stocks expected to decline in price to make a profit.

According to a Hankyung.com report on the 9th, last month the Exchange notified derivatives market makers from securities companies that they could begin short selling from the 2nd of this month. Under the original policy, if a market maker engaged in short selling, points were deducted from the business cooperation score; this penalty will no longer be applied. As a result, short selling has effectively resumed for all derivative products.

Market makers place buy and sell orders for designated stocks to reduce the bid-ask spread and help set prices. They buy and sell spot and futures to facilitate the market, and when they don't have the required holdings, they must borrow them. In this case, market makers primarily use short selling as a hedging tool rather than to make a profit. However, the Exchange's restriction on short selling exposed them to risk of loss during market making. From this month, this issue has been resolved and ordinary market making operations have resumed.

Even after short selling fully resumed at the end of March, the Exchange judged that there was no noticeable impact on the market, leading to the lifting of the ban for market makers. Previously, the Financial Services Commission imposed a complete ban on short selling in November 2023 to resolve illegal short selling issues. Allowing short selling for all stocks is the first time in about five years since March 2020. In reality, after the resumption of short selling, as of the 5th of this month, the KOSPI and KOSDAQ indices had risen by 13.34% and 12.39%, respectively. Contrary to some market concerns that short selling might drive down the market, a rally took place instead.

An Exchange official said, "We notified market makers that short selling would resume from June 2, so they should prepare in advance," adding, "Originally, we intended to eliminate the penalty from the business cooperation score when short selling was determined to have no impact on the market." He continued, "Considering the volume of short selling and overall market conditions, we concluded there was no reason to restrict short selling by market makers and thus decided to allow it."

Goh Jung-sam, Hankyung.com reporter jsk@hankyung.com