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Thursday, June 8, 2023

Short selling cuts revenue in half… Ants angry at insufficient improvement measures

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All of the top 10 short selling volumes on KOSDAQ this year have negative returns.
Yoon Seok Yeol’s takeover committee has come up with a plan to improve short selling, but there are no rules on underdogs and institutions.

The Korea Equity Investment Association (Korea Toyeon), a group of individual investors, recently launched a bus with phrases such as “Abolish short selling” and “Dissolve the Financial Services Commission” to campaign against short selling.

Recently, Donghak Ants (persons investing in local stocks) have once again raised their voice to “cancel short selling”. This is due to the fact that measures to improve short selling, proposed by the new government as a national task, are insufficient. Short selling is an investment method in which shares are borrowed when the share price is expected to fall and sold, and when the share price falls, buys the same number of shares and pays back the borrowed money for a profit. There are many cases where stock prices fall further in a downtrend and this has been criticized for being a “tilted playing field” because it is harder for individuals to participate than it is for foreigners or organizations.

On the 3rd, the Presidential Transitional Committee announced the “110 National Tasks” that Yoon Seok-yeol’s administration must complete over the next five years and proposed measures to improve the short selling system. The aim is to rationally reduce the margin rate (currently 140%) applied when individuals borrow shares for short sales and to allow an indefinite extension of the period during which shares can be borrowed (currently limited to 90 days).

Last May, the government partially resumed short selling (completely prohibited after Corona 19 in March 2020) for only the 350 large stocks that make up KOSPI 200 and KOSDAQ 150, and supported them for about a year. far. Meanwhile, as the global stock market deteriorated due to the tightening of US austerity measures and the start of the war between Russia and Ukraine, KOSPI fell from 3300 to 2600. Individual stock returns also remained low.

LG Display High Short Selling Yield -30% This Year

In particular, stocks with a high share of short sales showed a sharp decline in quotes. From the beginning of the year to the previous day, four of the top 10 stocks by short selling volume of KOSPI posted negative returns, according to the Korea Exchange data from the 11th. LG Display recorded the largest drop at -30.57%, followed by Samsung Electronics (-16.41%), Hanwha Life Insurance (-8.90%) and Doosan Energy (-2.39%). On KOSDAQ, all 10 stocks posted double-digit declines. Pearl Abyss, down 54.33%, was ranked first in terms of drop frequency, while Kakao Games (-38.82%) and Seegene (-38.46%) also dropped sharply.

This situation serves as a reason to encourage individual investors to “strengthen the regulation of short selling or eliminate short selling” rather than “allow them to participate in short selling like foreigners and institutions.” In addition, the government has promised to improve the short selling system, which has been unfavorable for individuals since the resumption of short selling last year, but its failure has also been a factor in increasing antipathy towards short selling. In fact, the short selling system is still structured less favorably for individuals than for foreigners and organizations.

Currently, short-term loans allowed in the domestic stock market are classified into L/L transactions and credit transactions. Lending transactions, mainly used by foreigners and institutions, have a long repayment period and low commission rates exceeding 5% per year.

Lending is a service in which foreigners and institutions lend and borrow shares through credit intermediaries such as the Korea Securities Depository and the Korea Securities Finance Corporation. For individuals, only those who are registered as professional investors with a financial investment product balance of 500 million won or more, an annual income of 100 million won or more, and a total asset of 1 billion won or more can use a credit transaction. Lending trading involves borrowing securities through a securities company, and most individual investors can borrow shares in this way and sell them short.

Loan term up to one year. However, since the repayment period can vary from contract to contract, it can be extended indefinitely. On the other hand, the maximum loan term for individuals using a credit operation is 3 months (90 days). Since the maturity period is a quarter of the maturity period for foreigners and institutions, it is difficult to predict the price of the shares, and if the forecast does not work, there is a risk of facing a “counter transaction” in which a securities company forcibly borrowing shares collects it.

Interest rates and fees are also lower for L/L transactions than for lender transactions. Due to the high creditworthiness of foreigners and institutions, the interest rate on lending transactions averages 4%, but the interest rate and fees are inevitably high when individuals borrow from securities companies. The short selling coverage ratio is also 140% for individuals and 105% for foreigners and organizations. The higher the collateral ratio, the higher the risk of cross trading.

Authorities push for inclusion in extended MSCI index, requiring short selling

In the first year after the resumption of short selling, the share of individual short selling in KOSPI was 1.91% (2,107.5 trillion won), far below the share of foreigners (74.9%, 82.5 trillion won) and institutions (24.1 %, 26.49 trillion won). Even on KOSDAQ, the share of individual short sales was only 2%. Yoon Seok-yeol’s administration, acknowledging this problem, has also promised to improve short selling from presidential campaign promises. However, the announced improvement measures do not satisfy individual investors.

In addition, financial authorities are currently pushing for Motanley Capital International (MSCI) to be included in the index of developed countries. One of the conditions for inclusion in the MSCI index of developed countries is the full resumption of short selling. In response, the financial authorities are of the opinion that there is not yet a full resumption of short selling, but some market observers predict that a full resumption of short selling will continue after the local elections on the 1st of next month.

Lee Seung Ho, Research Fellow at the Korea Capital Market Research Institute, said, “Inclusion in the MSCI Developed Countries Index is a long-awaited challenge for Korea and is expected to be a turning point for the Korean financial market. the market to make a leap forward.Although the principle of return to .

Reporter Ho Ji-eun hur.jieun

Source: Economist

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