Illegal short selling in South Korea to face maximum life sentence
South Korea has decided to extend its ban on short selling until March 30 of next year, while also introducing tougher penalties for illegal trading practices. The ban, which was initially implemented in November to combat naked short selling—where shares are sold without being borrowed first—was set to expire at the end of this month. However, authorities have extended the deadline to ensure that a system to detect improper trades is in place before short selling resumes.
“If we allow short selling without a monitoring system, there’s a risk that large-scale illegal activities will happen again,” said Kim Soyoung, vice chair of the Financial Services Commission. He added that the ban will be lifted on March 31 once the platform is ready, though it’s still unclear if the rule change will apply to all stocks.
In a separate announcement on Thursday, the government revealed plans to impose harsher penalties, including increased financial fines and life imprisonment for illegal trading activities. Both retail and institutional investors will be subject to the same terms regarding repayment and margin requirements, aiming to level the playing field.
Although retail investors, who are politically influential, have supported the ban on short selling, the move has sparked controversy within the financial community, where short selling is a common strategy. MSCI Inc. noted in its annual market review that South Korea’s short-selling accessibility is "deteriorating."
Jung In Yun, CEO of Fibonacci Asset Management Global Ptd, welcomed the decision to eventually lift the ban, saying it was "better late than never." He expressed optimism that the resumption of short selling would boost liquidity and reduce volatility in South Korea’s markets. However, he cautioned that this situation reflects how regulations in South Korea, like in China, can change suddenly, potentially damaging the country's reputation.
On Thursday, South Korea's benchmark Kospi Index rose by 1%, paring earlier gains of as much as 1.8%.
The government also announced plans to increase penalties for illegal short selling to six times the profit made from such activities, up from the current five times. Traders who earn at least 5 billion won ($3.6 million) from illegal trading could face life imprisonment, up from the previous maximum sentence of 30 years.