This image, provided by Yonhap News TV, shows the Korea Fair Trade Commission in the central administrative city of Sejong. (Yonhap)

South Korea's financial watchdog has launched an inspection into Morgan Stanley as part of efforts to intensify monitoring of stock short selling that has been blamed for excessive market swings, industry sources said Monday.

The inspection came about two weeks after Lee Bok-hyun, the head of the Financial Supervisory Service (FSS), underlined the need to keep tabs on illegal short selling, saying his agency is preparing to inspect brokerages where such transactions have been concentrated during times of stock declines.

Morgan Stanley is said to be among brokerages where large-scale stock short selling has taken place.

Short selling is a trading technique in which investors sell stocks they borrowed on expectations that share prices will fall. When the prices decline, they can make profits by buying back the stocks at lower prices.

Supporters say that short selling is necessary to increase liquidity in the market, but critics have called for a ban as it causes excessive market volatility.

Calls for tightening regulations on short selling have gained traction as the stock market has suffered a sharp decline recently amid worries over global inflation, monetary tightening and a possible economic slowdown. (Yonhap)