South Korea will fully resume short selling on March 31, marking the first time since March 2020 that the practice will be allowed for all listed stocks. (Image courtesy of Yonhap)
SEOUL, March 24 (Korea Bizwire) — After an unprecedented 18-month suspension, South Korea will fully resume short selling on March 31, marking the first time since March 2020 that the practice will be allowed for all listed stocks.
The move comes despite mixed results from the country’s longest-ever ban on short selling, which failed to deliver the anticipated boost to stock prices. While the benchmark KOSPI index rose 11.35% during the restriction period from November 2023 to March 20, 2025, the tech-heavy KOSDAQ fell 7.28%. Both significantly underperformed the S&P 500′s 30% surge during the same period.
“The short selling ban proved ineffective at propping up share prices,” said Shin Min Seop, an analyst at DS Investment Securities. “Rather than viewing its return negatively, we should see it as a foundation for more rational price discovery. Diverse investor participation will boost the value of competitive companies.”
Evidence suggests little correlation between short selling restrictions and market direction. Among the top 10 stocks with the highest short interest before the ban, six declined while four advanced. Hotel Shilla, which had the highest short interest at 7.64%, plunged over 40% from 65,000 won to 38,950 won despite the prohibition.
To address long-standing criticisms of an unlevel playing field, financial regulators have implemented new safeguards. These include standardizing the loan period for short selling at 90 days and setting uniform collateral requirements at 105% cash for both institutional and retail investors. Penalties for illegal naked short selling have been dramatically increased, with fines of up to six times the illegal profits and potential life imprisonment for violations exceeding 5 billion won.
A new central monitoring system (NSDS) has been introduced to prevent naked short selling. Lee Bok-hyun, head of the Financial Supervisory Service, expressed confidence that the system could prevent 99% of past violations based on simulations.
The resumption could help South Korea’s bid for inclusion in MSCI’s developed market index, from which the short selling ban had been a notable obstacle. However, some market analysts warn that the stricter regulations could undermine short selling’s role in maintaining market efficiency.
“Compared to other major markets, Korea now has among the strictest short selling regulations,” said Roh Dong-gil, an analyst at Shinhan Securities. “While tighter oversight may reduce volatility and improve retail investor sentiment, there are concerns it could hinder liquidity provision and price discovery.”
Historical data suggests any market impact may be temporary. During previous resumptions, such as in 2008, 2011, and 2020, initial volatility typically stabilized within a month. Regulators will implement enhanced monitoring of heavily shorted stocks for the first two months after resumption.
The decision comes after a sweeping investigation into illegal short selling by global investment banks, leading to 83.6 billion won in fines for 13 out of 14 firms scrutinized. Most violations stemmed from inadequate independent trading unit operations and arbitrary interpretations of stock borrowing agreements.
M. H. Lee (mhlee@koreabizwire.com)
