Foreign investors dominate short sellers after South Korea lifted ban

(Photo by Bloomberg)

(Photo by Bloomberg)

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(May 4): South Korea lifted what was the world’s longest ban on short-selling on Monday, and foreign traders piled in.

Overseas investors accounted for 90.7% of total daily shorts by value in Kospi on Monday, betting against 738 billion won ($659 million) worth of stocks, according to the Korea Exchange. They rushed in again on Tuesday, making up 86% of bearish bets. That’s well above the 59% of short values they averaged in 2019 before Korea imposed a ban on the trading strategy in March last year as the pandemic spread.

Much of foreign investors’ bearish bets weren’t a call on the broader market, however, and were targeted either on stocks they expect will be removed from key indexes -- like Lotte Corp. -- or highly valued biotech shares like Celltrion Inc.

After a 13-month ban, Korea resumed short selling on Monday on 351 stocks on Kospi 200 and Kosdaq 150. During the past year, retail investors who fueled record gains in Korean stock market have feared the repercussions from short selling and have asked regulators to impose a permanent ban.

Retail investors also showed some early signs of taking to the trade. Small-time traders made up 1.6% of daily shorts on Monday-- versus 0.8% in 2019. Local institutions were less downbeat than before: they accounted for just 7.7% of short value, about half of their daily average of such bets two years ago.

“Kospi in the past had about a 50-50 equal weight between foreign investors and local institutions,” said Sanghyun Park, an analyst at Smartkarma, adding local institutions “stayed quiet” when it came to short selling on Monday. It was too early to draw a conclusion about future foreign capital inflows based on one day of trading, he said.

The resumption of short-selling took a toll on markets on Monday, with the Kospi ending 0.7% lower and the Kosdaq, the smaller tech and health-care-heavy index, down 2.2%. Foreign investors were net sellers of Kospi shares again Tuesday, with the benchmark posting a modest gain.

The health-care sector on the Kospi 200 also rebounded 0.7% on Tuesday after slumping 4.9% on Monday. Retail favorite Celltrion, which was among the most shorted stocks on Monday, rose 4.2% after tanking 6.2% lower the day before. Shin Poong Pharmaceutical Co., a drugmaker that was heavily bet against on Monday and barred from being shorted on Tuesday by the exchange, slipped 1.8% on Tuesday after sinking 12.2% the previous day.

The exchange bars stocks from being shorted for a day if they were heavily targeted, and on Tuesday also banned family-controlled conglomerate Lotte Corp. from being bet against.