What Will Be the Impact of the March 31 Resumption of Short Selling?

Short selling will be fully resumed in the Korean stock market from March 31, 2025.
The Financial Supervisory Service began improving its computer systems to prevent illegal short selling after the short-selling ban on November 6, 2023, and plans to complete the system build sometime in March this year.
Many believe that the market will fall again once short selling resumes.
On the news of the short-selling ban on November 6, 2023, the Korean stock market surged for a day. A correction followed for a week afterward, but stock prices rose through the end of 2023. Then, from January 2024, the market rose through July 2024 while repeatedly going up and down.
Looking only at the flow of stock prices, without any other reasons, one could say this was the effect of the short-selling ban.
However, after July 2024, the Korean stock market failed to join the upward trend of the US stock market and kept falling until the end of the year.
And this was a period when short selling was also banned. In the end, a short-selling ban or resumption may have an effect in the short term, but over time, the market moves according to the country's economic situation.
Short selling has the drawback of potentially causing excessive declines in stock prices, but it also has the advantage of increasing market trading volume by enabling various investment strategies for institutions and foreigners.
[Improvements upon the resumption of short selling]
# Repayment period for short selling
1) Before the improvement
No separate repayment period was specified for foreigners' and institutions' stock lending transactions for short selling
2) After the improvement
Stock lending transactions must be repaid within 90 days; even if extended, the period cannot exceed 12 months
# Measures to prevent naked short selling
1) Before the improvement
Selling should be done after a stock lending transaction, but naked short selling without such a lending transaction was systemically possible
This short-selling system became a problem and was what triggered the short-selling ban.
2) After the improvement
Institutional investors must build computer systems capable of blocking naked short selling
Institutional investors submit short-selling information to the Korea Exchange every business day and must submit short-selling data when separately requested by a securities firm
# Restrictions on acquiring CBs and BWs when short selling
Investors who participate in short selling from the time the issuance of CBs (convertible bonds) or BWs (bonds with warrants) is disclosed until the date the exercise price is disclosed are prohibited from acquiring the CBs and BWs of that stock
# Penalties for short-selling violations
Violations of the measures to prevent naked short selling are subject to a fine of up to 100 million won and sanctions

In this improvement plan, the ban on naked short selling is the most important part, and in the words of the head of the Financial Supervisory Service, 99% of it can be caught.
Put another way, this can be interpreted as meaning that there is still a possibility that someone could engage in naked short selling.
Naked short selling is malicious trading that distorts the original function of short selling in the market.
If naked short selling disappears with this improvement plan, we hope the original function of short selling will be reflected, increasing trust, and that many foreigners will participate in the Korean stock market.