Illegal short selling suspicions reported to FSS rise

The number of suspected illegal short selling cases reported to South Korea’s financial regulator has risen steadily in recent years, as a new system allows authorities to monitor institutional investors’ short selling activity in real time.

The increase has been driven in part by the launch of its naked short selling detection system, known as NSDS, but market watchers say authorities should move faster to investigate cases, impose sanctions and recover illicit gains.

The Financial Supervisory Service received reports of 77 suspected illegal short selling cases last year, up from just two in 2020, according to data the regulator submitted to Rep. Park Sung-hoon of the ruling People Power Party, a member of the National Assembly’s Political Affairs Committee.

The number of suspected cases has risen year: 17 in 2021, 22 in 2022, 39 in 2023 and 47 in 2024. A further 42 cases had been reported to the FSS as of July this year.

The recent increase is partly attributable to the NSDS, which continuously monitors short selling transactions by institutional investors.

The system calculates an institution’s short position by time and checks sell orders against its holdings, allowing suspected illegal short sales to be detected immediately. It began operating on March 31, 2025, when short selling fully resumed in the market.

The NSDS identified 94 suspected illegal short selling cases in the 16 months up to July, including 36 cases this year. That accounted for 85.7 percent of the 42 cases reported to the FSS this year.

Before the NSDS was introduced, the Korea Exchange selected a sample of institutions and accounts from the day’s short selling transactions and referred suspected violations to the FSS. Authorities said the new system allows them to examine the short selling patterns of all 25 major institutions registered with it, resulting in more cases being detected.

Market conditions may have also contributed. Stock prices rose sharply from last year through the first half of this year, boosting demand among investors to take profits. At the same time, the use of total return swaps for hedging increased, contributing to a broader rise in short selling activity. That may have led to more suspected illegal short sales, according to market participants.

Park said authorities needed to do more than simply highlight the operation of the detection system.

“An increase in the number of cases being flagged each month means authorities need to move swiftly from detection to investigation, sanctions and recovery of illicit gains,” Park said.