Life Imprisonment For Short Selling? South Korea Extends Ban, Harshens Penalties

South Korea extended its short-selling ban on Thursday in an attempt to crack down on illegal “naked shorting” practices.

What Happened: South Korea announced it would extend its ban on short selling to the first quarter of 2025, per Fortune.

“The ban on short selling will be extended until March 30, 2025, to establish an electronic system to prevent naked short-selling and relieve concerns about such practices hindering fair pricing in the securities market,” the Financial Services Commission (FSC) said.

The decision came after prominent firms, including HSBC Holdings PLC HSBC and BNP Paribas ADR BNPQY, were fined by South Korea in a crackdown on naked short selling.

In a statement on Thursday, the South Korean government said they would penalize illegal short-selling practices with life imprisonment and harsher fines. Penalties could reach six times the amount of the profit from unlawful short selling, according to Fortune.

Why it Matters: Short selling, most commonly used by institutional investors, is a way to bet that a company’s share price will depreciate. Naked short selling is a financial practice that involves selling a security without first borrowing it or ensuring it can be borrowed. 

Short selling is not illegal in the U.S., but naked short-selling can carry fines or criminal charges, in extreme cases.

Short selling achieved attention in the U.S. following the short squeeze of GameStop Corp GME in 2021. At its peak, GameStop had a short float of over 100%. Investors on the Reddit community r/Wallstreetbets targeted other highly shorted stocks, including AMC Entertainment Holdings Inc AMC and KOSS Corp KOSS.

South Korea’s decision comes amid continued criticism of institutional short-selling practices by investors, particularly those in retail circles.

GameStop received renewed attention in 2024 after investor Roaring Kitty returned to social media and revealed a large position in the company.

Kohls Corp KSS, Beyond Meat Inc BYND and Spirit Airlines Inc SAVE are among the most shorted American companies in 2024, according to Benzinga.

Also Read: Trump Media & Technology Group Allege Naked Short Selling, Seek Nasdaq’s Intervention (Update-2)