Following GameStop, South Korea Financial Regulator Extends Ban on Short Sales

South Korean retail investors pointed to the U.S. GameStop saga to pressure local regulators to extend the country’s ban on short-selling stocks. They succeeded, at least for now. 

Then, GameStop happened. 

In January, retail investors in the U.S. banded together on Reddit to bet in favor of stocks (like that of American video game store GameStop) that certain Wall Street hedge funds were shorting. GameStop’s share price skyrocketed, forcing Wall Street investors to cover their losses by also buying the stocks, further boosting the price. 

U.S. retail traders were soon joined by eager small investors from all over the world. In South Korea, where retail investors dominate stock trading (accounting for 70% of the market), traders  drove around in a battle bus, covered in anti-short selling slogans. Around 30,000 Korean traders reportedly came together on an online forum to drive up the prices of stocks like Celltrion that are often targeted by foreign short-sellers. Some local politicians rallied behind retail investors who were calling for an extension of the ban.   

On Wednesday, Eun Sung-soo, Chairman of South Korea’s Financial Services Commission held a press conference, announcing that the ban was not only extended, but will only be partially lifted after May 2. The ban will still remain on over 2,000 stocks. 

“The partial resumption is intended to minimize the impact on markets, given these stocks have large market caps and liquidity so that the resumption of short-selling would have limited impact on stock prices,” the press statement said. 

Although local investors may have welcomed the temporary extension, this view is not shared by institutions around the world. On January 27, the International Monetary Fund (IMF) urged the country to lift the ban, now that the markets had stabilized. 

According to local media, on Wednesday, the Financial Times Stock Exchange (FTSE) reportedly sent a letter to regulators in South Korea warning them that it could revoke the nation’s classification as a “developed country” in the FTSE Equity Country Classification index should the ban remain in place. To qualify as a developed country, its equity market should permit short sales.  

In 2020, the Korean stock exchange was among the top 20 in the world in terms of market capitalization.



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Hedge fund behind shorting GameStop reports 53% loss in January

Melvin Capital started 2021 with $12.5 billion in assets before retail investors from Reddit caused the firm to lose billions on its GameStop short positions.

According to a Wall Street Journal report, the hedge fund has a little more than $8 billion in assets at the end of January, which includes a $2.75 billion investment from Citadel and Point72 Asset Management earlier this month. This represents a 53% loss, according to people familiar with the firm.

In the report, a client claims that Melvin has “massively de-risked” its investment portfolio following the controversy involving short selling GameStop stocks. People familiar with the hedge fund said Melvin has restructured its portfolio to improve its ability to exit securities easily. The hedge firm, as well as Citron Capital — another firm involved in the shorts — reportedly closed out their positions with GameStop last week.

Many of the major players involved in the GameStop short squeeze are facing outrage online after Robinhood — a platform with financial ties to Melvin — and other investment tools restricted trading for GameStop stock in the middle of a price surge. Retail investors seemingly being cut off from financial tools afforded to major hedge funds prompted allegations of market manipulation.

The U.S. Securities and Exchange Commission announced on Friday that it would be “closely [reviewing] actions taken by regulated entities,” purportedly in connection to the situation surrounding Citadel, Melvin, Robinhood, and potentially the retail investors from the r/WallStreetBets subreddit. In addition, Robinhood is facing two class-action lawsuits in federal courts in Illinois and New York.

The price of GameStop stock was $325 when markets closed on Friday, having risen 67% in the previous 24 hours.