Will the Full Resumption of Short Selling Be Delayed? Status of Illegal Short Selling Prevention System and Future Outlook

Financial authorities have recently reiterated a cautious stance on the full resumption of short selling, drawing significant market attention. The resumption, initially expected in the first half of this year, is now highly likely to be postponed until the perfect establishment of the Naked Short-Selling Detection System (NSDS).

3 Key Reasons Behind the Cautious Stance on Short Selling Resumption

The reasons why financial authorities are not rushing to resume short selling can be analyzed into three main points.

• Establishment of the Centralized NSDS: It takes physical time to develop a system to completely block naked short selling. The Korea Exchange aims to launch the system by the first quarter of next year.
• Strengthening Retail Investor Protection: With retail investors' distrust of the short selling system still high, fully resolving the 'tilted playing field' between institutions/foreigners and retail investors is considered a prerequisite.
• Managing Stock Market Volatility: Amid continuing global macroeconomic uncertainties, this is a preemptive measure to minimize the shock that a full resumption of short selling could have on the domestic stock market.

Ripple Effects on the Domestic Stock Market

As the ban on short selling is prolonged, market reactions are mixed. While concerns about foreign capital outflow are raised in the short term, there are expectations of positive effects in the long term, such as resolving the 'Korea Discount' and improving transparency by eradicating illegal short selling. In particular, some analysts say it could be an opportunity to improve the fundamental constitution of the stock market in conjunction with the corporate Value-up Program.

FAQ: Key Questions About Short Selling Resumption

Q1. When will the full resumption of short selling take place?

Summarizing the current stance of financial authorities, it is highly likely to be after the first quarter of 2025, when the Naked Short-Selling Detection System (NSDS) is expected to operate stably. If the system establishment is delayed, the resumption may be pushed back further.

Q2. Will extending the short selling ban negatively impact foreign supply and demand?

From the perspective of global standards, such as inclusion in the MSCI Developed Market Index, it can act as a somewhat negative factor. However, the consensus among experts is that it is not a fatal blow, as foreign buying has recently flowed in due to fundamental factors like the improvement in the semiconductor industry.

Q3. What is the Naked Short-Selling Detection System (NSDS)?

It is a computerized system that links institutional investors' internal balance management systems with the Korea Exchange's central system to detect and block naked short selling, which poses a risk of settlement default, in real time.