I borrowed 100 shares of Company A (borrowed balance), but when I tried to sell more than this, 200 shares, a notification popped up saying, "The number of borrowable shares for short selling has been exceeded." Only after borrowing the necessary amount could the short sale transaction be carried out. This is the internal short selling computerized system unveiled by KB Securities ahead of the resumption of short selling.
On the 19th, the Financial Supervisory Service, Korea Exchange, and relevant institutions introduced the newly built computerized system for short selling ahead of its resumption. The system aims to prevent illegal short selling based on a three-tiered computerized framework connecting institutional investors, securities firms, and exchanges.
Short selling involves borrowing stocks from others to place a sell order, aiming for profit when the stock price is expected to fall. What is often referred to as illegal short selling is "naked short selling." This is when a sell order is placed before borrowing the stock, with the borrowing occurring later. Most countries prohibit this practice.
Previously, managing short sale transactions manually made it difficult to catch illegal naked short selling. There were often cases where the borrowed balance was not adjusted until the settlement point after a short sale had been executed. This created an environment where naked short selling could happen, even if temporarily.
In response, relevant authorities have established a management system that prevents short selling of stocks exceeding the number of shares held at the time of the transaction. They have eliminated the possibility of naked short selling by checking the available borrowed balance in real-time.
Prior to this, all financial institutions with short selling transactions exceeding 1 billion won or where the short selling balance of a single stock surpasses 0.01% of the total shares must obtain a "short selling registration number." This has been evaluated as the establishment of a multi-layered system to prevent illegal short selling.
Short selling investors must report their transaction history to the "Short Selling Central Monitoring System (NSDS)" of the exchange. The exchange compares the balance reported by short selling investors against the real-time available borrowing balance. During this process, they identify instances where sell quantities exceed the available borrowed balance. If illegal practices are detected, the exchange will conduct further in-depth checks, and if confirmed as illegal short selling, it will notify financial authorities for investigation.
When the exchange entered the virtually created naked short selling details, it immediately appeared on the NSDS's "real-time monitoring status of illegal short selling." It also confirmed the absence of violations in the investor reports through the NSDS's "investor balance management system validation."
The exchange, institutional investors, and securities firms are operating a simulated market and are in the final checks of the short selling computerized system until the 26th. Park Jong-sik, executive director of the exchange, noted, "If the internal balance management system and NSDS operate organically, it is expected to alleviate negative perceptions about short selling and greatly contribute to the stabilization of the stock market."
Financial authorities plan to fully resume short selling transactions starting on the 31st. It has been 1 year and 4 months since the prohibition on short selling in November 2023.