Short-Selling Ban Sparks Biggest Rally in Korean Stocks Since 2020

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

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The nearly eight-month ban may help appease retail investors who have complained about the impact of shorting — the selling of borrowed shares by institutional investors — ahead of elections in April, several market watchers said. However, it could deter participation by foreign funds in the $1.7 trillion equity market and complicate Korea’s bid to seek a developed-market status in MSCI Inc.’s indexes.

The Kospi ended the day up 5.7% to cap its biggest gain since March 2020 amid a surge in trading volumes. Overseas investors were big buyers on a net basis, indicating that funds were covering short positions. Stocks that had recently witnessed an increase in short selling — including LG Energy Solution Ltd. and Posco Future M Co. — were among the biggest contributors to the benchmark’s advance. The small-cap Kosdaq Index jumped 7.3%.

READ: Korea Shorting Ban to Hurt Its Developed Market Aim: Street Wrap

The Financial Services Commission said on Sunday that new short-selling positions will be prohibited for equities on the Kospi 200 Index and Kosdaq 150 Index from Monday through the end of June 2024. The decision doesn’t impact existing positions. While pandemic-era curbs on the practice had been lifted for those two gauges in May 2021, the ban had remained in place for some 2,000 stocks.

“This policy reversal with respect to short selling is unwarranted at the current time,” said Wongmo Kang, an analyst at Exome Asset Management. “Many people view it as a political move aimed at next year’s general election,” he said, adding that the Korean market tends to be “heavily influenced by retail investors.”

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South Korea is set to conduct general elections for the National Assembly in April and public perception of short-selling remains deeply…

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