South Korean Stocks Jump After Regulator Bans Short Selling

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(Bloomberg) — South Korean stocks surged after regulators reimposed a full ban on short-selling for about eight months, a controversial move that authorities said was needed to stop illegal use of a trading tactic deployed regularly by hedge funds and other investors around the world.

The benchmark Kospi jumped as much as 2.7%, leading gains among regional gauges in Asia early Monday. Stocks that had seen recent jumps in short-selling positions, including LG Energy Solution Ltd. and Posco Future M Co., were among the biggest boosts. The small-cap Kosdaq Index rose as much as 4.4%. 

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The nation’s Monetary Companies Fee mentioned on Sunday that new short-selling positions will probably be prohibited for equities on the Kospi 200 Index and Kosdaq 150 Index from Monday by means of the top of June 2024. Pandemic-era restrictions on the promoting of borrowed shares had been lifted for these two gauges solely in Might 2021, whereas the ban has remained in place for some 2,000 shares.

READ: South Korea to Ban Quick-Promoting of Shares Till June 2024

The transfer comes forward of basic elections in April for the Nationwide Meeting in South Korea, the place public notion of short-selling stays deeply adverse. Some ruling get together lawmakers urged the federal government to quickly finish inventory short-selling in response to calls for by retail traders, who’ve staged protests in opposition to the apply. Most short-selling in South Korea is carried out by institutional traders.

The newest ban is “uncommon” as authorities are comprehensively prohibiting quick promoting at a time when there isn’t a monetary disaster, mentioned Huh Jae-Hwan, an analyst at Eugene Funding & Securities.

The Kospi surged earlier this 12 months on frenzied shopping for of electric-vehicle battery names and chip shares associated to the synthetic intelligence theme. Considerations over geopolitical tensions and excessive rates of interest reversed the rally in latest months, driving the benchmark right into a technical correction and practically erasing its acquire for the 12 months.

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The monetary regulator mentioned the market had been disrupted on account of “large” bare short-selling by international funding banks. The so-called “bare” number of the commerce includes shorting shares with out even borrowing them first. The regulator mentioned it’s now in search of to make enhancements to create a degree enjoying discipline for retail traders, with stronger punishments for merchants who break the principles.

READ: Korea to Advantageous Banks for Bare Shorts; Native Media Title HSBC, BNP

Whereas regulator’s argue that bare short-selling inhibits honest value formation and hurts confidence, some observers say broad outright bans make the market much less clear and subsequently much less engaging. Some say the restrictions could hold the market from being upgraded to developed standing from rising by index supplier MSCI Inc.

“It does compromise their standing and definitely would maintain them again from attaining developed market standing,” mentioned Gary Dugan, chief funding officer at Dalma Capital Administration Ltd. “Given that there’s a right away ban there will probably be an preliminary sharp transfer greater in inventory costs of firms which have had some quick promoting,” however the influence could also be restricted given low ranges of quick positions within the general market, he mentioned.

—With help from Abhishek Vishnoi.

(An earlier model of this story was corrected to indicate the ban was partially lifted in Might 2021)

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