Watchdogs are now developing a detection system for naked short selling in South Korea, a solution aimed at preventing illegal activities from institutional investors.
The Korea Exchange has announced the completion of a centralized detection system designed to monitor short-selling transactions and prevent illegal trading activities by institutional investors.
This initiative is crucial as the nation prepares to lift its ban on short selling, which was imposed in response to illegal activities uncovered in late 2023.
Introduction of the Naked Short-Selling Detection System (NSDS)
Starting Monday, the newly developed Naked Short-Selling Detection System (NSDS) will enter a trial phase in collaboration with approximately 30 major domestic and global institutional investors.
These firms represent over 90% of all short-sale transactions in the market.
The implementation of the NSDS is seen as a key requirement for resuming short selling, which has been on hold since November 2023 due to cases of illegal short selling involving global investment banks.
The ban, originally expected to be lifted by June 2023, has been extended until March 31, 2025, highlighting the need for robust regulatory frameworks to ensure fair trading practices.
Enhancing Market Trust and Integrity
The Korea Exchange has expressed optimism about the NSDS, stating that its establishment will help prevent naked selling practices and bolster investor confidence in short selling.
Naked short selling is an illegal practice that involves shorting stocks without borrowing them first, thereby creating an unfair advantage in the market.
During the trial phase, which will last through February, the NSDS will be integrated with electronic balance management systems set up by each participating institutional investor.
Following this trial, a mock market test is scheduled from March 6 to March 26 to ensure the stability and effectiveness of the system before it becomes mandatory on March 31.
Operational Guidelines and Industry Engagement
To facilitate a smooth rollout, the Korea Exchange plans to release detailed operational guidelines for the NSDS in Korean in January, followed by an English version in February.
The Exchange has also conducted four presentation sessions to introduce the system to both domestic and international institutions from September to December.
The Need for Strict Regulation on Naked Short Selling in the U.S.
As the Korea Exchange takes significant steps toward regulating short selling, the United States must also implement strict regulations to combat naked short selling.
This practice not only undermines market integrity but also poses significant risks to investors and companies alike.
In the U.S., the lack of stringent oversight has allowed some institutional investors to engage in manipulative trading practices.
By adopting a proactive approach similar to Korea’s NSDS, U.S. regulators can enhance market transparency and protect investors from the detrimental effects of illegal short selling.
The Korea Exchange’s initiatives reflect a growing recognition of the importance of regulating short selling and preserving market integrity.
As they prepare for the resumption of short selling, the establishment of the NSDS serves as a model for other markets, including the United States.
Implementing strict regulations on naked short selling is essential for fostering a fair trading environment, maintaining investor trust, and ensuring the overall stability of financial markets.
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Also Read: Short Sellers Are Now Under Federal Investigation For Collusion
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