South Korea’s Financial Supervisory Service (FSS) revealed its ongoing investigation into illegal short trades conducted by nine global investment banks. 

The investigation revealed approximately $156 million in such trades, affecting 164 different stocks. The names of these banks weren’t revealed. 

The probe, initiated late last year, addresses concerns surrounding market manipulation and illicit trading activities. 

Short-selling as a method of market manipulation against investors

Short-selling, a common investment strategy, is at the heart of the investigation. It involves investors borrowing and selling stocks with the expectation of repurchasing them at a lower price, thus making a profit. However, this strategy can also be misused to artificially drive down stock prices, leading to market volatility and potential harm to investors. 

According to Yong-il, senior deputy governor at the FSS, European banks were found to have committed more breaches than their US counterparts, with most of the investigated trades originating from their offices in Hong Kong. FSS officials are scheduled to visit Hong Kong later this month to provide updates on the global investigation.

Regulatory authorities are likely to impose sanctions on the banks involved, including fines and other disciplinary measures, to deter future misconduct and safeguard the integrity of the financial system.

Banks were responsible for 90% of short-selling activity

According to the FSS, the 14 banks under investigation collectively conducted 90% of short-selling trades by foreign firms in the country. 

Authorities characterized this practice as ‘rampant’ and responded by imposing a ban on all forms of short-selling until June 2024. However, this move has drawn criticism from some investors who are concerned about its impact on the market’s attractiveness to global funds.

Simultaneously, a special team was assembled to investigate all short-selling activities that central global investment banks conducted since May 2021. This timeframe marks when South Korea partially lifted a pandemic-era ban, allowing the resumption of short selling in stocks listed on the 200 Index and the Kosdaq 150 Index.

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