Korea Investment & Securities and Samsung Securities violated short-selling business rules and were found to have received, respectively, a sanction fine and a warning from the Korea Exchange (KRX). Korea Investment & Securities received a heavier penalty because the order size was relatively large. The exchange referred the case to the Financial Supervisory Service (FSS), and the financial authorities' final decision is expected in the first half of next year.
This case is the first detected and sanctioned since the introduction of the short-selling central monitoring system (NSDS).
According to the financial investment industry on the 3rd, the exchange's Market Surveillance Committee decided at its review on the 16th of last month to impose a "member sanction fine" and a "warning," respectively, on suspicious naked short-selling (sell first, borrow later) orders by Korea Investment & Securities and Samsung Securities. A sanction fine is classified as a heavy penalty among the committee's member sanctions (caution, warning, sanction fine, suspension of membership), while a warning is relatively a light penalty.
The Market Surveillance Committee is said to have compiled the results and forwarded them to the Financial Supervisory Service (FSS). The FSS plans to go through an investigation stage and make a final determination on whether the law was violated. Given current workloads, the FSS's final decision is likely to come after the end of the year.
Previously, Korea Investment & Securities and Samsung Securities processed orders first and then filed reports during the error-trade correction process, and the NSDS flagged them as suspicious naked short-selling orders. Naked short-selling is the act of selling shares before borrowing them, which is illegal, unlike covered short-selling.
In response, the exchange conducted an inspection. The NSDS, introduced by the exchange in March this year, analyzes naked short-selling, the uptick rule (a restriction on submitting covered short-selling quotes below the last execution price), and violations of the short-selling borrow-transaction marking requirement.
Brokerages say they have customarily used this method when correcting error trades for operational efficiency and that there was no intent to conduct illegal short-selling.
Some note that the authorities may use this incident as a warning example. That is because this is the first short-selling violation to lead to substantive action since the NSDS was introduced.
A securities industry official said, "It cannot be called odd that the NSDS extracted what had been done as a matter of routine, and it may be that the work was handled without following procedures set by law," adding, "Since the introduction of the NSDS has begun to reveal violations that were previously unseen, the Financial Supervisory Service (FSS) will sort them out one by one."
The Korea Exchange (KRX) and the Financial Supervisory Service (FSS) view the matter somewhat differently. The exchange, which operates the NSDS, focuses on sanctions against member firms, while the FSS judges mainly on whether the Financial Investment Services and Capital Markets Act was violated. That means penalties could be stronger based on whether legal procedures were not followed.
If deemed illegal short-selling, the government's April 2021 revision of the Financial Investment Services and Capital Markets Act allows for a penalty surcharge of up to 100% of the order value.
An official at the Financial Supervisory Service (FSS) said, "The measures imposed by the exchange are sanctions on member firms, and at the authorities' level, penalties can be imposed even in cases of gross negligence from an investor's perspective, even if there was no intent to engage in illegal short-selling."