▲ Financial Supervisory Service
Financial authorities have launched an investigation into suspected illegal short-selling transactions that have taken advantage of recent stock market volatility.
According to the financial sector and authorities on November 1, the Financial Supervisory Service (FSS) selected around 5 Kospi and Kosdaq stocks flagged as suspected naked short-selling transactions by the Naked Short-Selling Detection System (NSDS) between September and October through an emergency planned inspection last week.
The FSS plans to target domestic and foreign institutional investors, intensively examining whether naked short-selling took place by cross-checking their order and execution details against their stock holdings and borrowing records.
While the Korea Exchange constantly monitors institutional trading details through the NSDS, the FSS has swiftly stepped in to investigate the flagged suspicious transactions.
Short selling is an investment technique where an investor borrows and sells shares anticipating a price drop, then buys them back at a lower price to return them when the stock actually falls.
While it has positive aspects such as supplying liquidity to the market, naked short-selling—selling shares without borrowing them first—raises concerns of being abused for unfair trading practices like market manipulation.
Naked short-selling is prohibited in South Korea.
Illegal short selling can be subject to administrative fines regardless of the degree of violation.
Under the current Capital Markets Act, administrative fines can be imposed within the range of the unlawful short-selling order amount.
Criminal punishments, such as imprisonment with labor for one year or more, or fines ranging from 4 to 6 times the profits gained or losses avoided, are also possible.
An FSS official explained, "This is a preemptive measure to strengthen monitoring and investigations into market-disturbing activities amid heightened market volatility."
The FSS plans to take strict measures if illegal activities are confirmed during the investigation.
As volatility in the domestic stock market has recently expanded, financial authorities are also growing more vigilant against activities that disturb market order.
After hitting the 7,000 milestone at 7,003.74 on October 2, the Kospi showed a downward trend and has recently been fluctuating between the 5,500 and 6,000 ranges.
Following the sharp decline of major indices on the New York stock market on October 30 (local time), it could act as downward pressure on the domestic stock market on November 2.
During the emergency market inspection meeting held on October 15, financial authorities and related organizations warned, "We will respond strictly with a zero-tolerance principle to market-disturbing activities such as spreading false rumors, market manipulation, and illegal short selling that exploit market instability."
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