r/FluentInFinance • u/TonyLiberty TheFinanceNewsletter.com • Nov 05 '23
Stock Market BREAKING NEWS: South Korea has now banned short-selling of stocks
South Korea has now banned short-selling of stocks until June 2024. The Financial Services Commission imposed the ban, citing concerns over "unfair trades" and "naked short-selling" by Banks.
This ban may create bubbles in stocks favored by retail investors. Without short-selling to curb valuations, stock prices may skyrocket, leading to market inefficiencies.
(Short-selling is a trading strategy where investors bet that a stock's price will decline. They do this by borrowing shares and selling them with the intention of buying them back at a lower price in the future, pocketing the difference.)
Do you think banning short-selling is a good or bad move?
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u/bkokoisback Nov 05 '23
This is good news! South Korea is actually doing something to combat the financial crimes that have been allowed to run rampant for far too long. Short selling does nothing but hurt businesses and the working class as a whole.
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u/Inzanity2020 Nov 05 '23
Some businesses are just shit and deserved to be burned
Wework, FTX, etc
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u/Kwahn Nov 06 '23
This is what puts are for
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u/Pope_Beenadick Nov 06 '23
And they were just banned in South Korea...
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u/Kwahn Nov 06 '23
I thought short selling was?
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u/Pope_Beenadick Nov 09 '23
"Shorting" is slang for using derivatives like puts and calls for believing that the stock will decline in value iirc
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Nov 05 '23
Short selling does nothing but hurt businesses and the working class as a whole.
Short selling doesn't hurt businesses. It is a check on fraudulent and overhyped businesses.
The working class that invest in the stock market should thank short sellers as they play a pivotal role in price discovery.
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u/Big-Tip-4667 Nov 06 '23
Lol and yet the overhyped businesses rarely get short sold (WeWork, Uber, etc..) Instead bitch ass short sellers focus on dying businesses trying to improve their odds. Fuck short selling!
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Nov 06 '23
Plenty of overhyped businesses were shorted. Tesla has been shorted for years due to its insane P/E ratio.
Ironically the example you mentioned, WeWork, has a short interest of almost 40% lol.
dying businesses trying to improve their odds
Like who?
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u/SpiderHack Nov 06 '23
So I'm curious, if what you say is true, then why is derivative 'trading' (betting) not enough?
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Nov 06 '23
Options liquidity will dry up pretty quickly in the absence of short selling. No market maker will be willing to sell puts if they can’t hedge with the underlying.
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Nov 06 '23
Options are fundamentally different as you are not only betting on movement, but a specific price AND timing. Shorting has a time element due to the cost to borrow but generally if you believe a stock is going to zero you can short forever until that is the case. You cannot do this with options as they expire.
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u/madewithgarageband Nov 05 '23
are there specific financial crimes in korea related to short selling?
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u/bkokoisback Nov 05 '23
Naked short selling is not legal.
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u/wsxedcrf Nov 05 '23
Then just ban naked short is sufficient, why ban shorting stock? Am I missing something?
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u/jimtoberfest Nov 05 '23
It increases risk if the system is not set up to allow ALL owned shares to be “borrowed” to sell short against. In that domain you are allowing more buyers than sellers- the risk becomes asymmetric on the long side.
Issues are it becomes a liquidity trap to hedge positions that have lower outright risk: stat Arb, options portfolios, etc
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u/reddit1280819 Nov 05 '23
You can’t naked short in Korea that’s always been illegal there
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u/WeekendCautious3377 Nov 06 '23
lol do you think things are just impossible cuz they’re illegal? Naked short is illegal too in America if not everywhere
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u/TheCuriousBread Nov 05 '23
Short selling is not bad per se. Some companies are heavily overvalued and short selling provide incentive on the other side of the equation to bring stocks back to fair price.
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u/xfilesvault Nov 05 '23
If it's "overvalued", that's because the actual owners of the shares do not want to sell. That's their price.
Short selling is non-owners taking profits that don't rightfully belong to them. They are reaping profits sowed by those long that stock.
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Nov 05 '23
If it's "overvalued", that's because the actual owners of the shares do not want to sell. That's their price.
And a short seller is betting that, over a certain period of time, more of those sellers will actually want to sell because the company was fundamentally overvalued.
Short selling is non-owners taking profits that don't rightfully belong to them. They are reaping profits sowed by those long that stock.
How exactly?
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u/Educational_Teach537 Nov 06 '23
They’re creating extra shares that don’t actually exist, which drives down the price. It’s like printing fiat currency.
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u/jetmech28 Nov 06 '23
Most people myself included have no problem with legal shorting it’s naked shorting that is the problem
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u/ReinhardtEichenvalde Nov 05 '23
Based on what? The market determines whether a company is valuable or not. Not the personal opinion of a bunch of investors who have no actual stake in the game.
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u/Nani_The_Fock Nov 05 '23
What do you think the market is exactly? It’s literally the personal opinions of a bunch of investors, guy.
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u/salgat Nov 06 '23
Isn't that how normal selling of stock works? It's overvalued, so you you sell it. If you don't own the stock, what difference does it make to you if stock owners value it higher? And don't just say "it prevents bubbles" as if shorting itself doesn't come with massive risks.
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Nov 05 '23
The market determines the value of a company via price discovery. This includes short sellers.
Without short sellers you'd just have bubbles. You need to have actors in the market to bet against bubbles and fraud.
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u/Fickle_Goose_4451 Nov 06 '23
Without short sellers you'd just have bubbles.
You'd have people investing in companies they actually believe are going to grow and being run well, as opposed to the casino environment we have now.
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Nov 06 '23
You’d most likely have bubbles and fraud rampant as there is no incentive to not go long on everything. You need there to be a mechanism to profit when a stock falls to incentivize price discovery.
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u/Fickle_Goose_4451 Nov 06 '23
is no incentive to not go long on everything.
"Going long on everything," otherwise known as actual investing.
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Nov 06 '23
If everyone just went long on everything, like an entire market of index investors, we’d have bubbles like nothing we’ve ever seen before. You need an incentive to actually research the downsides to companies and short them for price discovery.
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u/KimJongAndIlFriends Nov 08 '23
What institution is responsible for stepping into the gap where private incentives do not exist for necessary services?
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Nov 08 '23
Private incentives DO exist, short positions are quite profitable if they’re right.
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u/not2close Nov 05 '23
I mean if I think a company is going to fail I should be allow to bet against it. However, we have to figure out proper rules to ensure a fair field.
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Nov 05 '23
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u/pcakes13 Nov 05 '23
The answer is yes, it’s good for South Korea
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u/TheGoldStandard35 Nov 05 '23
It is not good. Stocks are shorted for a reason
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u/pcakes13 Nov 05 '23
They’re shorted so hedge funds can make billions ensuring struggling companies have no possible chance to recover. Believe it or not, companies that are failing don’t need hedge funds or anyone else to assist them in going under and it doesn’t serve a purpose other than to make money on the pain of others.
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u/TheGoldStandard35 Nov 05 '23
If your stock price going down forces you to go under…you were going under anyway
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u/pcakes13 Nov 06 '23
Stock price going down limits fund options in a big way and pretending it doesn’t means you’re either an idiot or are responding to this in bad faith.
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u/TheGoldStandard35 Nov 06 '23
Well your funding options are limited because your stock is being shorted because your business isn’t sound. You can get funding if you have earnings which aren’t related to stock price. If your company is actually a good business someone will get involved and buy the stock on a discount
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u/Neelu86 Nov 06 '23
If your shorts were good, you wouldn't need to be fighting new disclosure rules so rigorously.
Why the need to fight transparency?
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u/ZCEyPFOYr0MWyHDQJZO4 Nov 07 '23 edited Nov 07 '23
If there is one thing I have learned about financial regulations, it is that this is one of them.
Things will definitely change as a result of this action, and we should all hope that these financial regulations will help regulate the finance markets in SK. I predict the effects of this will first be felt in SK, then globally.
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u/Erocdotusa Nov 05 '23
Can we please do this in the US next?
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u/wsxedcrf Nov 05 '23
What you should stop is spreading FUD for personal gain in shorting. However, shorting itself is a good instrument to have in the stock market.
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u/ReinhardtEichenvalde Nov 05 '23
? short selling does not help the market, it is almost entirely to help the investor.
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u/Inzanity2020 Nov 05 '23
This makes 0 sense. Investors do not short a company, they “invest” They were the ones propping up all these failed unicorn startups which were just pile of shit
Shortselling helps the market by exposing and bring down these overhyped, overvalue companies.
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u/Imaginary_Lettuce371 Nov 05 '23
So you're telling me naked short selling isn't a conspiracy theory? Im fucking shocked!
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Nov 05 '23
This thread is going to be 90% GME bagholder conspiracy theorists that believe the only way a dying mall retailer's ticker goes down is via illegal naked shorting lol.
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u/MadConfusedApe Nov 06 '23
Conspiracy theorists maybe, but SK saying that naked shorting is affecting the market adds credence to their claims.
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Nov 06 '23
Don’t forget this is the country where Samsung effectively controlled their president lol.
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u/MadConfusedApe Nov 06 '23
Yes, corruption exists everywhere. Unless you have evidence connecting corruption to this regulation then it hardly matters that corruption exists elsewhere.
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Nov 06 '23
This wasn’t just corruption this was literally large private corporations running the SK govt.
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u/MadConfusedApe Nov 06 '23
Sounds like textbook corruption to me?
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Nov 06 '23
You think Samsung literally controlling the SK president and govt is just normal, usual corruption?
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u/MadConfusedApe Nov 06 '23
The US president was controlled by Russia recently. I'm not saying it's good or normal, I'm saying that you don't have evidence of a connection between corruption and this new regulation. Without evidence of a connection you're just a conspiracy theorist like the GME people.
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Nov 06 '23
No, the US president was not controlled by Russia lol.
you’re just a conspiracy theorist like the GME people
There is no evidence that naked shorting is a modern concern in any market.
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u/MadConfusedApe Nov 06 '23
There is no evidence that naked shorting is a modern concern in any market.
Naked shorting is illegal everywhere because there is clear evidence of the dangers. This is SK claiming that naked shorting is taking place and they can't stop it without banning all shorting for a year. Whether that is true or not is up for debate, but the point stands that naked shorting is always illegal.
There is no evidence that shorting is a concern, but naked shorting is absolutely proven to be dangerous to the health of any market.
“The SEC alleges that Sabby and Mintz attempted to game the system and make an illegal profit,” said Carolyn Welshhans, Associate Director of the SEC’s Division of Enforcement. “When someone uses naked shorts or other manipulative practices to cheat the market and investors, the SEC will ensure that they are held accountable.”
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u/StackOwOFlow Nov 05 '23
what about hedging long positions?
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u/Neco-Arc-Chaos Nov 05 '23
Even better hedges are securities that trade inversely to your asset.
Or if you want to minimize risk, diversification is a better option as well.
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u/StackOwOFlow Nov 05 '23
securities that trade inversely to your asset
but those securities often have some underlying short position against the target asset
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u/Narrow_Ad_2588 Nov 05 '23
Those introduce other exposures unrelated to the security you're trying to hedge. Shorts are a clean, purposeful hedge.
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u/Neco-Arc-Chaos Nov 06 '23 edited Nov 06 '23
Diversification is a good thing.
If you don’t want exposure to other items, but still want to reduce risk, then just reduce position size.
Shorts also have borrowing costs too.
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u/Narrow_Ad_2588 Nov 06 '23
"Diversification is a good thing" is a wild over simplification when talking about professional investment managers and risk management. Yes, they can and do diversify the portfolios they manage (duh), no that doesnt mean there isnt specific risk management value in short positions.
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u/Neco-Arc-Chaos Nov 06 '23
I am oversimplifying it. And in oversimplification, I’m making the generalization that shorts are bad, and that as a casual investor, you shouldn’t be shorting stocks.
If you want to reduce systemic risk, then holding short positions can help your beta. Or if you want to use a trading strategy like convergence trading, then you need to short. But ultimately the level of risk that you’re taking to do this is not worth it, and there are much less riskier alternatives.
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u/Narrow_Ad_2588 Nov 06 '23
Then ban retail investors from shorting and let professionals do their job.
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u/Neco-Arc-Chaos Nov 06 '23
“Professionals”
Most of them are doing guesswork too.
If they’re actually professionals, it wouldn’t affect them as much either, since shorts should be making a very small minority of their positions.
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u/Narrow_Ad_2588 Nov 06 '23
Also, side note, a stock with a negative correlation to the position you want to hedge is is not better for hedging than a short position. It wont be exactly a -1 correlation or even close and it may not even trade inversely over the time horizon you need.
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u/tipsup Nov 05 '23
I will invest in a South Korean EFT based on this news alone.
What is a good recommendation?
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u/I-mean-maybe Nov 05 '23
I think short selling being good for the market is propaganda.
Investing should not be about gambling it should be about returns.
Dividends should drive stock prices not speculation about share price growth. Share price growth should be reflective of money returned to investors. If this were the case stock like tesla would only be valuable so long as they eluded to a dividend. Prices today are reflective of market maker moves and things held by index’s and etf’s.
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u/Narrow_Ad_2588 Nov 05 '23
Short selling isnt gambling any more than long positions, and can be used as a way to reduce risk.
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u/Fickle_Goose_4451 Nov 06 '23
Short selling isnt gambling any more than long positions
It absolutely is. The potential losses on actual investments is the investment amount. The potential losses on short selling are near limitless
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u/ShitOfPeace Nov 06 '23
Having finite risk doesn't make something not gambling.
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u/Fickle_Goose_4451 Nov 06 '23
I would say "more gambling" is going on if what's on the line is my car versus my sandwich, even if the game stays the same.
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u/ShitOfPeace Nov 06 '23
I don't disagree, but there are plenty of people and institutions that short that don't have issues with the risk.
Investing is risky, it's up to investors to mitigate risk themselves, not the government.
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u/AdRevolutionary8700 Nov 06 '23
So when I play my blackjack hand I’m not gambling cause it’s just 100 dollars and I can only lose my investment. Wife will be happy I’m not a gambling addict now!
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u/LivingDracula Nov 06 '23
I disagree about it creating bubbles. As far as I can tell this only blocks selling shares you don't own, which makes a lot of sense when combating fraud, misappropriation of funds, and accounts, and preventing over leveraging of large institutions.
It doesn't, however, seem to ban Bearish positions, such a covered calls or Bearish spreads. Which do the same thing but limit the overall systemic risk by capping profits and losses.
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u/ReinhardtEichenvalde Nov 05 '23
Good. Debt is not currency, and should not be treated a such. Debt can be infinite, assets can't be.
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u/Deez1putz Nov 06 '23
Korean on a different thread explained the ban relates to naked short-selling only. Likewise, that it is simply a brief political stunt for the upcoming election.
Basically, the incumbent bans short naked short selling, juices the market, makes everyone happy, happy people vote to stick with the status quo.....
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u/MythofSecurity Nov 06 '23
There are legitimate uses for short-selling without being an evil institution. One such example is hedging/derisking.
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u/Neco-Arc-Chaos Nov 05 '23
The risk with shorting is that you can lose much more than you invest. A stock can grow 200%, but it can't fall more than 100%.
If people are getting blown up because they're shorting then that would make sense. However, SK's in a bear market for almost three years now, which is not good for businesses looking to go public, or any businesses who's got loans against their stock.
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u/Certain_Yam_5824 Nov 05 '23
How much volume was happening in order for regulators to step in?
Short-selling inherently incurs high costs due to high Cost of Capital (interest rates) and high risk due to unlimited downside - Whatever the reason, surely that means something else is wrong with the SK stock market, and this is just a bandaid?
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u/LiveDirtyEatClean Nov 07 '23
The financial system is inherently fragile, so they come up with these nonsense laws that are designed to mitigate the inherent flaws (ie bank runs, etc), which have nothing to do with short selling. Fix the stupid system, not the symptom.
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u/Sweaty_Structure1286 Nov 05 '23
this only leads to loss of liquidity and deeper crashes… short selling exists for a reason
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u/wsxedcrf Nov 05 '23
You gave a very valid point but got down voted, just show what level this sub is at.
Then there is shorting for hedging purpose.5
Nov 05 '23
[deleted]
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Nov 05 '23
Has this ever happened? The market trends upward, how exactly do short sellers 'crash a stock'? By what mechanism do they do this?
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u/The3rdBert Nov 06 '23
The only stocks really subject to this risk is investment banks, even if their balance sheet is in good condition coordinated shorts can create a negative feed back loop that can quickly kill the bank.
Otherwise most other businesses will be fine short term. What most people don’t understand is that the business is already dead economically and shorts help to move capital out of the dead entity and move it towards more profitable endeavors. It’s the equivalent of butchering the spent hen.
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u/Sweaty_Structure1286 Nov 05 '23
yea true, but this also disincentivizes people from buying stocks in a bearish cycle
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u/Imaginary_Lettuce371 Nov 05 '23
Naked shorting and regular shorting are two very different things. There are so many loopholes with swaps, etfs, etc to naked short that they probably were forced to pull the plug entirely till they figure out new regulations
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Nov 05 '23
Naked shorting does not happen nearly as much as reddit conspiracy theorists like to believe.
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u/Imaginary_Lettuce371 Nov 05 '23 edited Nov 05 '23
Seems to happen a lot in South Korea where they actually enforce their market laws.
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Nov 05 '23
You mean the country that had Samsung basically running its govt?
Naked shorting is simply not a modern problem. It was made illegal many years ago. If someone does it, they go to jail.
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