As the KOSPI index surpasses 6,400, debate over short selling is once again gradually surfacing in Korea's stock market. When share prices plunge, calls grow louder to ban the practice, and when markets stabilize, arguments emerge to allow it again. But this debate has been misdirected from the start. The real question is not "whether to abolish short selling." It is "how to root out illegal short selling and market-disrupting forces."
Short selling is not inherently illegal. The International Organization of Securities Commissions (IOSCO) has long viewed short selling as a normal market trading technique, provided that strong risk controls, reporting, and enforcement frameworks are in place. The European Securities and Markets Authority (ESMA) takes the same position. European short selling regulations permit short selling in principle but prohibit naked short selling and require net short positions above a certain threshold to be reported to supervisory authorities. The rules are designed to allow exceptional restrictions when market instability increases.
In short, the international standard is clear: "Permit legal short selling, but strongly control illegality and opacity."
The United States operates this principle most pragmatically. Through Regulation SHO, a comprehensive short selling rule introduced by the US Securities and Exchange Commission (SEC) in 2004, traders must confirm the availability of stock borrowing before executing a short sale, and accumulated failed-to-deliver positions must be closed out. Additionally, when a stock drops 10% or more in a single day, Rule 201 is triggered, putting the brakes on short selling from pushing the price further down on that day and the next. The United States does not ban short selling outright. Instead, it precisely regulates the pace at moments that could shock the market.
Another characteristic of the US market is that institutional capital follows growth companies once they reach a certain size. The Nasdaq 100 is an index that includes and weights constituents based on market capitalization. The larger a company grows, the greater its weight in the index. Pension funds, asset managers, and exchange-traded funds (ETFs) that track the index then naturally flow capital into that company. Put simply, once a company survives in the market and proves its capabilities, a structure operates that transforms its status from "short selling target" to "leading blue-chip growth stock." Tesla's inclusion in the S&P 500 was a symbolic moment.
In Korea, however, the same scene is received entirely differently. When an innovative company grows rapidly, anxiety about "becoming the next short selling target" arises before any expectation of "a Korean Tesla emerging." This anxiety is not overblown, because the Korean government itself has acknowledged the problem.
When the Financial Services Commission (FSC) decided to fully ban short selling in November 2023, it cited the detection of massive illegal naked short selling by global investment banks, concerns over the undermining of fair price formation, and weakened confidence in the capital market. In 2024, the ban was extended on the grounds that further institutional improvements were needed. Ahead of the planned resumption in 2025, the Korea Exchange's naked short selling detection system, institutional investors' electronic balance management, and daily balance submission systems have all been newly built to secure market stability. This series of developments shows that the core of Korea's short selling problem lies not in the system itself but in the previous absence of a sufficient system to routinely detect illegal short selling.
This is also why the government constantly wavers between banning and permitting. On one side are market efficiency and international credibility. Morgan Stanley noted in its 2025 market accessibility assessment that conditions had improved along with the permitting of short selling. The Korea Capital Market Institute also listed the resumption of short selling and institutional improvement together as key capital market tasks for 2025. On the other side are deep-rooted distrust among retail investors and political burdens. The moment that sanctions feel weak or delayed despite repeated cases of illegal short selling, the short selling debate becomes not an institutional debate but a fairness debate, and even a political one. The government appears to waver because it has always reacted late between market logic and political logic. It is time to change direction. What the government must manage is not the sword of short selling itself. It is the hand that wields the sword unfairly. Policy must focus on that point.
First, naked short selling should be treated close to a one-strike-out basis. Simply imposing fines a few times cannot restore market trust. Repeat-offending institutions should be barred from participating in Korea's short selling market for a certain period, and violations and sanctions should be disclosed more transparently. Financial authorities have already strengthened sanctions for short selling violations, but enforcement must rise to a level the market actually feels.
Second, disclosure of short selling balances and securities lending transaction information must be more granular. This is also why the SEC strengthened reporting of large short positions. Markets react much more calmly when they know who is shorting how much and in what manner, rather than simply knowing that short selling exists. When information is visible, there is less room for rumor.
Third, a three-dimensional surveillance system is needed that simultaneously tracks false reports, anonymous messenger rumors, and specific trading patterns. Korea's problem is not simple sell orders but persistent suspicions that the spread of negative information and trading move together. That being the case, having the Financial Supervisory Service (FSS), the Korea Exchange, and investigative authorities each look separately is insufficient. A permanent joint surveillance system is needed that cross-analyzes short selling balances, securities lending transactions, report distribution, online rumor diffusion, and actual trading timing. What is needed now is not simple market surveillance but a crackdown on market-disrupting networks.
Fourth, temporary buffers to protect growth stocks need to be more sophisticated. A mechanism like the US Rule 201 that automatically slows short selling during sharp drops is a realistic way to reduce market shocks without banning short selling outright. Korea has always been trapped in the binary of full ban or full permission, but it is now time to actively consider a middle solution: permission under normal conditions and automatic braking during sudden swings.
The core is simple. Even when innovative companies prove their capabilities, Korea's market still responds with "caution" before congratulation. There are markets where growth turns a company into a leading stock that attracts more capital, and there are markets where growth makes a company a target of rumors and illegal short selling. The answer to which market will nurture more Nvidias and Teslas is already determined.
The government has one task. It must manage legal short selling through institutions, track illegal short selling forces through joint systems across all agencies, and impose the heaviest criminal and administrative responsibility on market disruption. The future of Korea's capital market does not hinge on whether to support or oppose short selling. It depends on how coolly illegality and legality can be separated, and how fairly growing companies can be protected.
