This article was published on April 28, 2025, at 4:45 p.m. on the ChosunBiz MoneyMove (MM) site.
The Financial Supervisory Service (FSS) imposed a penalty surcharge of about 840 million won on the illegal short-selling activities of global investment banks (IBs) last month and has now started to examine cases of illegal short-selling by small to mid-sized investment firms.
According to financial authorities on the 28th, the FSS special investigation team is currently investigating suspected cases of illegal short-selling by small to mid-sized investment firms reported by the Korea Exchange. An FSS official noted, “During the past year, we focused resources and personnel on a comprehensive investigation of global IBs, temporarily putting on hold the investigation of suspected cases received from the exchange,” adding that it has begun to look into the cases now that the investigation of global IBs is complete.
Short-selling is a transaction method in which borrowed shares are sold on the market and later bought back to repay. When a drop in stock prices is anticipated, selling shares first and buying them back at a lower price can convert the price drop into revenue. While short-selling is necessary for stabilizing the stock market and expanding market liquidity, there have been many criticisms that 'naked short-selling,' which involves placing a sell order without borrowing shares, has become a hotbed of illegality.
The FSS has launched an investigation into regulatory violations targeting the top 14 global IBs engaged in short-selling transactions in South Korea as of November 2023. These 14 companies account for more than 90% of the total foreign short-selling transaction volume. The Securities and Futures Commission under the Financial Services Commission has begun the process of imposing penalty surcharges starting with 26.5 billion won against BNP Paribas and HSBC in December 2023. As of last month, the total amount of penalty surcharges imposed on 13 global IBs over the past 1 year and 4 months is 83.65 billion won.
After completing the investigation of global IBs, the special investigation team has turned to investigate the reported cases of suspected illegal short-selling stored from the exchange. Typically, illegal short-selling is recognized when the exchange identifies issues during the settlement process and penalizes the investment firm. Cases related to investor losses are separately reported to the FSS.
The FSS did not disclose the scale of damages involved in the cases currently under investigation. It is expected that the penalty surcharges would be smaller than those imposed on global IBs. An FSS official stated, “The cases currently under investigation have smaller violation amounts compared to global IBs, and the institutions involved are relatively small,” noting that they occurred before the prohibition on short-selling.
Meanwhile, there are predictions within the FSS that the role of the special investigation team may be reduced in the future. This is because financial authorities introduced the ‘Central Short-selling Check System (NSDS)’ last month to prevent illegal short-selling in advance along with the resumption of short-selling. The NSDS uses the investment firm's balance management system to detect illegal short-selling automatically, verifying whether shares have been borrowed both by the investment firm and the exchange.
The FSS previously increased the size of the short-selling investigation team from about six to around 20 members to investigate illegal short-selling by global IBs. A financial authority official noted, “I understand that there are currently no decisions made regarding the restructuring of the special investigation team,” adding that it could be reduced to a small team to focus on monitoring tasks as before; however, considering that the issue of illegal short-selling is significant, the size may be maintained for the time being.