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After a ban on short selling took effect, intense herd behavior drove Korean stock prices up on Monday. Foreign investors hurried to buy shares to close short positions, and secondary battery stocks rallied, driven by retail investors.

Since short-term surges are typically followed by corrections, observers are waiting to see whether the short selling ban will lead to more volatility in the market.

The KOSPI, Korea’s benchmark index, ended the day at 2,502.37 points, up 5.66% from the previous day of trading. The KOSDAQ, another index, ramped up 7.34%. That was the biggest jump for the two exchanges since March 2020.

Notably, a sidecar trading curb was activated on the KOSDAQ after stocks rose precipitously at the beginning of trading. A sidecar curb temporarily invalidates calls from program trading. The last time a sidecar was activated on the KOSDAQ was three years and five months ago.

Secondary battery stocks shot up, reversing a downward trend. Ecopro, EcoPro BM, POSCO Future M and Kum Yang all finished trading at the upper limit (30%).

Those stocks had all surged in the first half of the year, but with their prices well above corporate valuations, a number of investment firms had lowered target prices. For the same reason, numerous investors had taken out short positions on those stocks.

Financial derivatives based on secondary battery stocks, including Samsung Leverage KRX Secondary Battery K-New Deal ETN and Tiger KRX Secondary Battery K-New Deal Leverage, shot up by more than 50%. In short, speculators were having a field day on the exchanges.

Of course, Monday’s bull market wasn’t only due to the ban on short selling.

Another major reason is that the global stock market has been regaining stability after US treasury yields began to cool, even as Korean stock markets lost considerable ground last month. Major Asian stock exchanges in regions such as China, Hong Kong and Japan were also up after the US’ three major indices rose around 1% on the final day of trading last week.

Experts believe the ban on short selling triggered herd behavior that caused Korean stocks to surge. Stocks rose as investors took steps to close short positions.

Short covering is what happens when short investors buy stocks to return borrowed shares.

Kim Dae-jun, an analyst with Korea Investment & Securities, wrote in a report Monday that “short covering due to the short selling ban needs to be taken into consideration” when predicting short-term stock movements.

“Stocks with a lot of outstanding short positions will see the most movement in the short term,” Kim remarked.

In the long term, however, the short selling ban could lower the appeal of the South Korean stock market, potentially leading more foreign investors to withdraw from the market and deterring others from entering.

US-based Bloomberg News reported Sunday that the short selling ban could present an obstacle for South Korea being added to Morgan Stanley Capital International’s (MSCI) list of developed markets.

The Korean government has worked hard to secure the country’s inclusion on the index because a large number of foreign funds automatically buy stocks on bourses in markets on MSCI’s list.

The Korean government acknowledges that the short selling measure could have a negative impact on foreign investors. Lee Bok-hyun, the governor of the Financial Supervisory Service, told reporters Monday that the government “has taken into consideration the issue of foreign investors and other side effects from the perspective of market management.”

Rather than a market crash, more are concerned that the short selling ban may present an obstacle to overall market stabilization. For one thing, it leaves the government with one fewer measure to take when financial markets are roiled by factors at home or abroad. For example, Seoul banned short selling to stabilize the market when stocks were plunging during the financial crisis of 2008.

“In the long term, we could see funds, especially foreign funds, leaving the market, and stock market volatility could increase in that process,” said Lee Hyo-seob, a senior analyst for the financial services industry at the Korea Capital Market Institute.

“There are concerns that in times of greater volatility, speculative or unfair trades can occur in bullish stocks or stocks with low trading volumes,” Lee added.

By Cho Hae-yeong, staff reporter; Lee Jae-yeon, staff reporter

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