After the launch of the "Sky Ban Order", the South Korean stock market staged a "deep V" reversal soared. The South Korean comprehensive index rose by 123.38% from its lowest point in March 2020, becoming one of the world's most powerful stock markets.

With the end of the longest "short ban" in history, South Korea's stock market will face a major test next Monday.

After the launch of the "Sky Ban Order", the South Korean stock market staged a "deep V" reversal soared. The South Korean comprehensive index rose by 123.38% from its lowest point in March 2020, becoming one of the world's most powerful stock markets.

The lifting of the "short ban" has also aroused the vigilance of Korean retail investors. The "WSB" retail investor movement similar to the United States is also emerging, and South Korean retail investors have begun to join forces to target short sellers in the market.

The longest "short ban" in history ended

Starting from May 3 (next Monday), constituent stocks including South Korean comprehensive stock price index 200 and Cosdaq Index 150 blue chip stocks will be allowed to short . These stocks account for about 22% of all listed companies on the Korean exchange and 88% of the total market value, while more than 2,000 other small and medium-sized stocks in South Korea will still be banned from shorting.

While allowing some short selling, the top 28 South Korean brokers can provide retail investors with margin trading services, with a maximum short selling amount of 30 million won (approximately RMB 175,000). This subsequent upper limit may be further increased, and the market value of short selling stocks in the retail market can reach up to 2.4 trillion won (approximately RMB 14 billion).

Before the epidemic, only 6 brokerages provided retail margin trading services, providing up to 20.5 billion won stocks.

KB Securities quantitative analyst Kim Min-gyu pointed out that companies with valuations exceeding peers such as electric vehicle battery supplier SK Innovation, shipping company Hyundai Merchant Shipping, biopharmaceutical company Utd Tox , etc., are more likely to become short targets.

In history, whenever the stock market has suffered a sharp decline, South Korean regulators will adopt stable measures to prohibit short selling. The 2008 global financial crisis and the 2011 European fiscal crisis, the South Korean Financial Committee issued a ban on short selling for 8 months and 3 months. 's 13-month air ban also set a new record in South Korea.

"Short ban" under the bull market, South Korean retail investors grew

In March 2020, in order to cope with the decline in the stock market under the impact of the epidemic, South Korea urgently introduced "rescue" measures, temporarily banning stock short-selling trading . After the launch of the "Sky Ban Order", the South Korean stock market staged a "deep V" reversal soared. The South Korean comprehensive index continues to hit record highs, with the latest closing price rising by 123.38% from the lowest point in March 2020, becoming one of the world's most powerful stock markets.

While the stock market is rising sharply, the entire Korean stock market ecosystem is also changing, and the proportion of retail investors entering through Internet brokerage channels has become increasingly larger.

The Financial Times reported that is currently about 1/5 of South Korea's 52 million people, and retail trading accounts for about 60% of the daily trading volume of the Korean market.

But the long-term ban on air has also affected the hedge configuration of institutional investors. Due to the inability to effectively hedge risks, overseas investors have continuously reduced the proportion of funds allocated to the South Korean stock market.

data shows that from March to December 2020, South Korean individual investors net bought about 38.1 trillion won stocks (approximately RMB 220.7 billion) in the stock market, far exceeding foreign investors (net buying 21.5 trillion won), while institutions netted 8.2 trillion won.

But with the partial lifting of the longest "sky ban" in history, the Korean market may experience volatility.

Korean retail investors have joined forces to fight

The lifting of the "short ban" has also aroused the vigilance of Korean retail investors. The "WSB" retail investor movement similar to the United States is emerging, and South Korean retail investors have begun to join forces to target short sellers in the market.

Korean retail investors began to gather in the Kstreetbets forum hosted by the Korea Stockholders Alliance (mainly composed of day traders). About 70% of the forum members are male office workers in their 30s and 40s.

Kstreetbets members called themselves " ant " and named their movement "Donghak (Dongxue) Ant Movement", an uprising by North Korean farmers in 1894 against corrupt aristocrats and foreign forces in North Korea.

Unlike American retail investors, Korean retail investors rely more on political movements to achieve their demands.

In February this year, Kstreetbets members launched a campaign, with nearly 30,000 investors demonstrating in the city center to try to prevent the government's plan to lift the short selling ban. More than 200,000 South Korean retail investors signed an anonymous petition on the Presidential Office website, requesting the South Korean president to permanently make the short ban.

, chairman of the Korean Stockholders' Alliance, said that short sellers are the "evil axis of South Korea", and South Korea's short selling rules are more conducive to professional institutional investors than small traders like them.

Under pressure from retail traders, South Korean regulators finally extended the duration of the "short ban" twice.

Meanwhile, retail investors have also successfully convinced the government to abandon plans to expand capital gains tax on retail trades with large portfolios and have revised rules that allow more retail investors to participate in the IPO.

In addition to the political movement, Kstreetbets members also try to achieve their political goals through votes.

Financial Times reported that Kstreetbets members are calling for a campaign against candidates for the ruling party in the mayoral by-election held in Seoul and Busan this month:

If we unite, we can change things. If our voices are louder, the government will pay attention. "

Faced with the lifting of the short ban, institutional investors were relatively calm and were not worried about the impact of lifting the short ban on the market.

Goldman Sachs Previous research stated that after the lifting of the short ban, South Korean stock markets had adjustments and increased volatility, but both recovered lost ground in about a month. In addition, lifting short bans will also help accelerate the inflow of foreign capital.

Lyndon, head of securities at ASIFMA, financial industry organization Chao said that it is understandable to take restrictive measures on extreme volatility in the market during the epidemic. As the market is currently at a historical high, the volatility of the Korean stock market has also dropped significantly to pre-epidemic levels, so the entire industry is very positive about the cancellation of the ban.

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