Foreign brokerages prevalent in illegal short selling

Foreign brokerages in Korea have continued to engage in illegal short selling in the domestic stock market this year despite the government’s determination for a tougher crackdown against the practice.

The Moon Jae-in administration has proposed a bill to toughen rules on naked short selling by giving criminal punishment but the bill has remained tied up in the National Assembly for nearly a year due to the prolonged standoff between the ruling and opposition party.

Short selling refers to the sale of borrowed shares in the hopes of making a profit from the price fall by buying the shares back at a lower price. And naked shorting refers to the practice of conducting short selling without actually borrowing the stocks first, which is prohibited in Korea.

According to the Financial Supervisory Service (FSS), the Securities and Futures Commission has dealt with 10 naked short selling cases to fine foreign brokerages a total of 468 million won ($402,269) this year. The Securities and Future Commission is a watchdog division in the FSS to monitor and regulate unfair trading practices in the nation’s securities and futures market.

“The agency fined less than 50 million won on average against foreign brokerages when they committed naked short selling this year,” said a retail investor surnamed Kim.

“Such practice causes serious damages especially to retail investors. The watchdog should come up with a tougher punishment against these firms.”

Of the foreign securities firms active in Korea, Goldman Sachs was fined 7.5 billion won last year for illegally shorting 20 stocks on the Seoul bourse. It was the heaviest punishment ever imposed against a foreign securities firm.

Despite the heavy punishment, Goldman Sachs was fined once again in April for conducting naked short selling. It was the third time for the U.S.-headquartered global investment bank’s units to be punished for the illegal practice in the past year.

“The Goldman Sachs case displays foreign securities firms do not really care about financial authorities’ punishment,” main opposition Liberty Korea Party Rep. Joo Ho-young said.

Separate from the government’s bill currently tied up in the National Assembly, the Financial Services Commission announced a revision Oct. 17 to allow it to impose penalties up to 90 million won for a single case of illegal short selling from next year. The current maximum fine is set at 60 million won.