[Deep Dive] Global IB Illegal Short Selling Detections and the Crisis of Market Trust

Shattered Trust: Endless Detections of Illegal Short Selling

Despite the financial authorities declaring a 'zero-tolerance' policy on naked short selling, the continued detection of illegal short selling by global investment banks (IBs) is fundamentally shaking market trust. Although tens of billions of won in fines were imposed by 2025 following a massive comprehensive investigation, cases of cleverly evading the regulatory net continue to be reported as of 2026. Notably, in the first half of 2026, it was newly revealed that major foreign financial institutions, including Goldman Sachs, and some domestic brokerages violated naked short selling rules, citing balance management system errors or arbitrary interpretations of stock borrowing contracts. The fact that large institutions, which should possess strict compliance systems, violated rules due to elementary system errors is a huge shock to market participants, proving that blind spots remain in the authorities' surveillance network.

Deteriorating Community Sentiment: The Uneven Playing Field Debate Reignited

The recent string of illegal short selling detections among major IBs has sparked an unprecedented level of fierce backlash within retail investor communities. What triggered the investors' anger most is the lukewarm sanctioning level by the regulatory authorities. Despite clear rule violations, massive controversies over slap-on-the-wrist punishments are erupting as some large institutions received 'market warnings' instead of monetary fines, citing initial system setup errors or low regulatory predictability. Investors strongly criticize that the 'uneven playing field' structure—where strict standards are applied to retail investors while being infinitely lenient toward foreigners and institutions—has not improved at all. This worsening sentiment goes beyond speculative dissatisfaction, spreading into deep skepticism about the transparency and fairness of the capital markets itself, and acting as a primary driver stimulating the urge to exit the domestic stock market.

Mandatory Digitalization and Future Market Trajectory

Ultimately, the crux of the matter depends on the practical settlement of the Naked Short Selling Detection System (NSDS) and the mandatory short selling digitalization framework, which are in full operation as of 2026. The financial authorities plan to block illegal activities at the source by real-time cross-verification of all trading histories and balance data through this system. As the system advances, foreign institutional investors' short-position strategies will inevitably pivot to become much more conservative than in the past, serving as a factor that temporarily reduces the overhang of short selling supply across the broader market. However, to restore investors' lost trust, a 'consistent precedent' of uncompromisingly strong punishments upon detection is absolutely necessary. Until the uncertainty of regulatory risks is completely resolved and the system's integrity is fully proven, structural distrust surrounding short selling is expected to continuously act as a heavy discount factor limiting the valuation ceiling of the domestic stock market.