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Canada should do the same indefinitely

[Speedypete]

South Korea is prohibiting stock short-selling until June 2024, in a move that triggered a big rally for equities and increased trading volumes. The benchmark KOSPI and the tech-heavy KOSDAQ soared 5.7% and 7.3%, respectively, resulting in both indexes closing out their best session since late March 2020. Short-selling is an investment strategy in which traders or hedge funds sell borrowed shares with the aim of buying them back later at a lower price. It's a risky and costly strategy that requires a margin account and collateral, with the potential for unlimited losses as the stock's price can rise indefinitely.

Snapshot: "The [South Korean] measure is aimed at fundamentally easing 'the tilted playing field' between institutional and retail investors," Financial Services Commission Chairman Kim Joo-hyun said at a news briefing. "Amid continued uncertainty in financial markets, major foreign investment banks have been engaged as a matter of practice in unfair trades... and we determined that it would be impossible to maintain fair trading discipline." The regulator added that it will also implement a zero-tolerance approach to illegal practices like naked short-selling, with a special investigation team to be established and "perpetrators facing criminal prosecution." Naked Short Selling: What It Is & How It Works

To note, South Korea had already banned short-selling during the coronavirus pandemic. The ban was lifted in May 2021 for trades of companies on the KOSPI and KOSDAQ with large market caps, but the restrictions have remained in place for more than 2,000 equities. It comes as a vocal group of retail investors has continued to complain about the impact of shorting, influencing public perception ahead of general elections for the National Assembly in April. However, according to exchange data, short-selling in South Korea only accounts for a fraction of the market, about 0.6% of the KOSPI and 1.6% of the KOSDAQ.

Over in the U.S.: The SEC has issued controversial bans on the short-selling of certain stocks before, covering hundreds of financial equities during the financial crisis of 2008, and it was again discussed during the banking crisis earlier this year. Many have cited that regulatory intervention was needed, at times, to protect companies and stabilize the market, which could have real-world effects like spooking depositors or prompting bank runs. Others have argued that the restrictions were not only unnecessary, but actually harmed market quality, stability and discovery. In turn, those could impact liquidity and pricing efficiency, while short-sellers may use other instruments like futures, options and swaps to get around any bans. SEC approves new rules on short sales and securities lending disclosures