On Sunday, South Korea’s securities market regulator announced that two investment banks based in Hong Kong were found to have engaged in naked short selling. This is anticipated to result in a record fine.

The Financial Supervisory Service (FSS) disclosed in a statement that the two unnamed investment banks had earned a total of KRW 40 billion ($29.58 million) and KRW 16 billion from naked short-selling trades, respectively.

Under South Korean capital market laws, naked short selling—selling stocks without first borrowing them or verifying their availability—is prohibited.

The global banks’ period of violation is recorded to last for 9 months until May 2022 and 5 months until December 2021. The FSS predicts that this will result in hefty fines.

The FSS stressed the need to ensure such violations don’t recur despite efforts by authorities to create a more favorable environment for foreign investors. It also highlighted that it would examine similar practices among other investment banks.

Naked short selling can destabilize the stock market, leading most countries to ban the activity. However, it is permitted in some countries, and global investment banks occasionally exploit this. The revelation that global investment banks violated this prohibition in Korea has sent shockwaves.

In light of this incident, South Korean financial regulators are expected to strengthen oversight of illicit activities by global investment banks and impose severe penalties for violations. Moreover, global investment banks must adhere to Korean laws and avoid actions that jeopardize stock market stability.

This event will serve as a wake-up call regarding the illicit activities of global investment banks. Additionally, South Korean financial regulators must strengthen collaboration with global investment banks to maintain stock market stability and protect investors’ interests.

Exchange Rate: 1 USD = 1,352.2100 KRW

Note:

Naked short selling refers to placing a sell order for a stock without having borrowed it in advance. It’s a type of short selling where investors anticipate a drop in stock prices to seek profit. However, due to its potential to destabilize the stock market, it’s banned in most countries.

Short selling is an investment technique where an investor borrows a stock, sells it, then buys the stock back to return it to the lender. Naked short selling, unlike regular short selling, places sell orders without borrowing the stock, risking the inability to return the stock. This can reduce market liquidity and increase stock price volatility.

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