Financial Supervisory Service Governor Lee Bok-hyun (FSS)

Korean stocks surged Monday on the expectation that investors will start to cover their short positions after the country’s financial authorities banned short selling.

The main Kospi bourse climbed 5.66 percent, or 134.03 points, from the previous trading day to close at 2,502.37. The secondary Kosdaq jumped 7.34 percent, or 57.4 points, to close at 839.45.

Earlier in the day, the buying pressure prompted sidecar curbs on the Kosdaq for the first time in more than three years. The five-minute halt in trading on the Kosdaq activated at around 10 a.m., after a surge of over 5 percent.

Program trading on the secondary bourse is halted when the Kosdaq 150 futures rises or falls by more than 6 percent, or when the Kosdaq 150 index fluctuates by more than 3 percent. This marked the first time trading was halted since June 16, 2020.

Heavily shorted stocks saw spikes in their prices.

“Considering that rechargeable batteries, bio, duty-free and travel occupy the highest short selling balance, it is necessary to leave open the possibility price increase momentum will form due to supply and demand centered on these industries,” said Han Ji-young, an analyst from Kiwoom Securities.

The soaring market was driven by the Financial Services Commission's announcement of a short selling ban, effective from Monday through the end of June 2024.

The measure was aimed at preventing illegal short selling practices by large institutional investors and protecting retail investors, but it also raises concerns of erosion of foreign investors' trust in the market.

It additionally raises concerns over the potential distraction of Korea from its objective to seek an upgrade in the MSCI index, a stock index provided by Morgan Stanley.

In response to these concerns, Financial Supervisory Service Gov. Lee Bok-hyun on Monday emphasized that, for the time being, financial authorities consider gaining trust from individual Korean investors a higher priority than building foreign investor confidence.

"In a situation where trust in the domestic stock market is declining, many Korean investors are shifting to overseas markets like the US, and we need to demonstrate to individual investors that our stock market is as appealing as those in advanced countries," Lee said.

He added, "Our stock market can be as attractive as, or even more so than, markets in New York or London.”

He also talked about the objective to be upgraded in the MSCI index.

In June, Korea, despite its aspirations to be reclassified from an emerging market, did not secure its place on the watch list for an upgrade to MSCI developed market status.

"Inclusion in advanced indices is not the ultimate goal itself," Lee said. He added that the primary objectives are the quantitative and qualitative growth of the capital market in Korea.

While Lee acknowledged the importance of short selling operations for achieving this upgrade, he emphasized that the focus on building trust should encompass not only foreign investors and institutions, but also individual investors within South Korea.

Along with a pledge to further strengthen investigations into foreign investment banks that have conducted illegal short selling, the governor highlighted that the FSS will look into the role of domestic securities firms.

"Some specific overseas investment banks' transactions are challenging to operate without domestic securities firms. There is strong doubt regarding whether they have fulfilled their duty at an appropriate level of gatekeeping when it comes to placing short selling orders,” he said.

In a tone of exasperation, Lee also clarified that the decision to suspend stock short selling was made without any regard for the impending general election.

Some industry insiders have speculated that the decision was influenced by pressure from President Yoon Suk Yeol.

The timing of Yoon's statements, coinciding with the announcement of the ban on stock short selling by the Financial Services Commission, has only fueled these speculations. President Yoon's office stated Sunday night that he views illegal stock short selling as a significant social issue and "malady."

"It is a misconception to think that someone ordered suspension and we made the decision accordingly without any review. It was made after several months of evaluation within the government,” Lee added.

He underscored the prevalence of illegal short selling in Korea to justify the decision to ban such activities.

"In the case of recently discovered illegal short selling conducted by global investment banks, over 100 stocks from both the Kospi and Kosdaq were affected," he emphasized.

He was referring to the announcement last month.

The FSS announced that BNP Paribas and HSBC submitted orders for illegal short selling without borrowing for over 100 stocks, including Kakao and Hotel Shilla, totaling approximately 56 billion won ($43.2 million).