South Korea on Monday lifted the longest short-selling ban in the country’s history, after tightening measures to crackdown on illegal transactions.

The short-selling ban was put into place in November 2023 following a series of short-selling breaches that involved numerous global investment banks.

Beginning Monday, short selling on the estimated 2,700 stocks listed on the Korea Exchange will be fully reinstated, according to the country’s Financial Services Commission. Previously, it was only allowed for 350 stocks on the benchmark Kospi and small-cap Kosdaq.

Unlike the country’s previous short-selling bans, the latest ban was largely driven by regulatory reasons and geared at protecting retail investors, industry experts said.

Previous short-selling bans in Korea happened from:

• October 2008 — May 2009 during the global financial crisis
• August 2011 — November 2011 during the Eurozone debt crisis
• March 2020 — May 2021 during the Covid pandemic

Additionally, while earlier bans aimed at stabilizing financial markets, the 2023 measure targeted systemic reforms to improve retail investor accessibility, analysts from Macquarie said.

Penalties for short selling have been significantly strengthened, with the Korea Exchange introducing a system that can detect naked short selling. Naked short selling involves shorting stocks without borrowing them and is illegal in South Korea.

Fines for illicit profits have also been raised, and enforcement measures have been tightened. A profit of 5 billion Korean won ($3.4 million) or more can result in a prison term between five years to life imprisonment. 

Short selling has become a controversial issue in South Korea, with the nation’s strong pool of retail investors saying the practice pushes stock values downward.

“Retail investors account for more than 50% of the market trading volume, making the local stock market a key political issue for the Korean government,” said KB Securities’ Managing Director Peter Kim.

Foreign investors have been caught in the crosshairs of the short-selling ban, and some global investment banks have been penalized. As recent as February, the country’s Financial Supervisory Services imposed fines on several large investment banks like JPMorgan and Morgan Stanley for breaching short-selling rules.

The lifting of the ban is expected to boost South Korea’s market.

A return to short selling should bring positive effects for the overall market and investors, said Kim, who added that the additional liquidity of the market will encourage greater participation of more hedge funds and enhance market transparency. 

“Value is set to outperform growth. This is another reason for our belief that the resumption of short-selling is likely to be neutral to positive for the broad market,” Macquarie’s analysts said.

Goldman Sachs also foresees higher trading activity from foreign investors once short selling resumes, with around 70% of total short-selling activities conducted by foreign investors.

“Once resumed, short-selling activities should improve market efficiency and price discovery, presenting potential alpha opportunities,” the investment bank said.