Two months after financial authorities introduced a system to block illegal short selling, cases suspected of illegal short selling were detected. The Korea Exchange recently captured this and notified the Financial Supervisory Service. However, it is expected to take more time to confirm whether the case is actually illegal short selling.
There were concerns about whether the electronic system introduced by financial authorities in March would function properly, but with the detection of suspected cases just two months after its implementation, expectations have risen that the system to block illegal short selling will perform its intended role.
According to the Financial Supervisory Service and the Korea Exchange on the 30th, the exchange recently reported the suspected illegal short selling cases detected through the 'Central Short Selling Monitoring System (NSDS)' after conducting an audit.
An official from the exchange noted that "as of last Friday, we have initiated an audit of illegal short selling and notified the FSS of the cases. However, we cannot confirm the specific scale until the legality is ultimately verified."
Short selling is a transaction method where one borrows stocks expected to decrease in price, sells them, and then buys them back to repay. It is a necessary system to prevent overheating of stock prices and to enhance market liquidity. The problem arises with 'naked short selling,' which is illegal in Korea.
In a situation where there are significant concerns over illegal short selling, financial authorities introduced the 'Central Short Selling Monitoring System (NSDS)' on March 31 to block it in advance. The NSDS is a system that detects illegal short selling by electronically linking the balance management systems of investment firms. Investment firms and the exchange can automatically check the borrowing status of stocks and detect illegal short selling beforehand. The exchange will notify the FSS after conducting an audit on confirmed violations among the suspected illegal short selling cases detected by the NSDS, including naked short selling, bid manipulation, and uptick rule violations.
The FSS is verifying whether the suspected illegal short selling cases reported by the exchange are indeed illegal. If illegality is confirmed, the FSS plans to take disciplinary actions through the Financial Services Commission's Securities and Futures Commission.
However, since the NSDS is still in its early stages, it is necessary to examine whether the suspected cases detected this time are indeed illegal activities. Since it is the first time illegal short selling suspected through electronic means has been detected, it is expected to take time to investigate the details. There have also been instances of types of short selling that were not identified prior to electronic monitoring, and some of the suspected cases are reported to involve order amounts as low as several tens of thousands of won.
Ham Yong-il, deputy director of the FSS's capital markets and accounting division, stated, "We will improve the system by examining the cases we have received notification about," adding, "We are discussing ways to encourage participation from global investment banks."
Market participants see great significance in this detection of suspected cases, confirming that the NSDS is functioning properly. There were concerns that errors could occur or that the system might fail to catch illegal short selling since the electronic system was being introduced in the country for the first time, but evaluations show it has operated more accurately than expected.
An official from the securities industry noted that "many in the industry had doubts about the effectiveness of the NSDS when it was introduced, but this case has confirmed that the system works properly," stating that "institutional investors will also pay more attention to compliant short selling orders in the future."