South Korea’s army of retail investors declares war on short sellers

Jung Eui-Jung, a former employee of the South Korean bank, recalls his bitter experience as a novice stock trader more than a decade ago, when he lost Won25m ($ 22,000) after retiring the small metal group he went to. invest.

“It’s the past I want to forget. At the time, I didn’t have much access to information. I would be forced to lose in an environment inclined against amateur traders, ”said the 62-year-old head of the Korean Stockists Alliance, a defense group representing some 44,000 retail investors.

But the charts have changed over the past year, as retail investors have become the dominant force in South Korea’s stock market, accounting for nearly 60 percent of daily turnover. With this weight, amateur traders have become a political force that seeks to equalize odds against professional investors.

Popular and parent investors bought a net gain of 63.9 million Korean shares last year, compared to a net sale of 5.5 million gains in 2019. This helped boost the benchmark. Kospi 118% after a recent coronavirus-driven sale. March, doing so one of the best represented world markets.

Nearly one-fifth of Korea’s 52 million population is engaged in equities and data show that local brokers have amassed Won76tn in cash deposits.

“Market dynamics are changing rapidly as individual investors become a powerful force that even hedge funds should be afraid of,” said Albert Yong, managing director of Petra Capital Management, an investment firm. based in Seoul.

The wave of Korean amateur traders has been inspired by a US campaign against hedge funds that had made bearish bets on companies such as the gaming retail chain GameStop. Kstreetbets, an online forum aimed at short sellers, is named after the popular Reddit group r / WallStreetBets.

Kstreetbets members call themselves “ants” and have christened their cause as the “Donghak Ant Movement,” a reference to a failed farmers ’uprising in 1894 against corrupt aristocrats and growing foreign influence in Korea. Today, many Korean retailers feel that they have been exploited by local institutional and international investors.

“Ants” test their political power by demanding regulatory changes in the stock market. Some had called for a campaign against the party ‘s candidates for government in by-elections of mayor this month in Seoul and Busan, the two largest cities in the country, and in the presidential vote next year.

“We can change things if we unite. The government will pay attention if our voices get bigger, ”said Jung of the KSA.

Approximately 70% of the members of the Kstreetbets forum, run by KSA, are office workers between the ages of 30 and 40. Many are investing in Korea’s fast-growing biotechnology sector and promising future industries such as electric vehicle batteries.

In February, Kstreetbets members launched a brief campaign that encouraged the purchase of shares in Celltrion and HLB, Korea’s leading biotech companies, which had been targeted by short sellers.

But out of concern about local rules against stock manipulation, Kstreetbets members have focused on lobbying efforts.

Short sellers are like Grim Reaper to many amateur traders

Korean regulators have twice extended the short-sale ban introduced a year ago after pressure from retailers. Amateur investors also persuaded the government last year to withdraw plans to extend capital gains taxes to retailers with large portfolios and amend rules to allow for greater retail participation in initial public offerings.

Its current goal is the partial lifting of the short sale ban, which would allow investors to bet again on large-cap stocks starting in May. Amateur investors believe the ban has helped Kospi increase despite short sales accounting for only 6.5% of total transactions at Korea’s main board in the year before the ban was introduced, according to Korea Capital Markets Institute. This compares to an estimated 35-40 percent in markets such as the US, Japan and Europe.

“South Korea is a paradise for short sellers. The unilateral rules of the game have allowed them to siphon money from novice traders, ”said Jung of KSA.

International investors to argue that short selling is needed to cover your exposure to Korean stocks and that it can help prevent stocks from being overvalued.

“Short sellers are like Grim Reaper for many amateur traders, who often buy short-term rumor stocks, regardless of their fundamentals,” said Hwang Sei-woon, a KCMI researcher. “They just blame the falls on short sale stocks without thinking about their risky investment patterns.”

Kstreetbets members fly other strict measures against professional investors, such as higher collateral requirements to borrow shares to sell them in the short term.

They have also called on the State National Pension Service to increase its national holdings, accusing a recent market correction of the strong sale of Korean shares of the fund.

“It’s a David fight against Goliath,” a prominent Kstreetbets member said. “We know that our chances of winning the fight against short sellers are still very low, but we will continue to fight injustice. Then our children can live in a fairer world. ”