Shares of South Korea ADRs, ETFs Rise Following Government Ban On Short Selling Through First Half of Next Year

Benzinga

South Korea is prohibiting stock short-selling until June 2024, in a move that triggered a big rally for equities and increased trading volumes.  #1 Morning Stock Show To Get You Ready For The Stock Market Open, PreMarket Gainers, Earnings This Week, Economic Data & More!  Benzinga PreMarket Prep 8:00AM ET- 9:00AM ET BenzingaTV on YouTube.

Transcript

00:00 Hey Mitch, do you have the actual headline from South Korea?

00:02 Yeah, well, of course South Korea will ban stock short selling until June after protest

00:10 from retail investors.

00:12 So the protest is what got them to lean to this side.

00:17 So I don't know if you guys want to go and ban short selling here, you might need to

00:21 go and get your protest.

00:23 Go get to Washington DC right now because I don't think it's going to happen.

00:28 But let's just be honest, the way that the market works, and I said this on Twitter,

00:32 is that money goes into a poll, right?

00:35 And then money gets pulled out the poll every single day.

00:38 There's winners and losers.

00:41 That's the way the market works.

00:42 There's no way of making it in every win scenario where everyone wins.

00:47 Everyone just goes long and everybody wins.

00:49 There has to be a counter bet, right?

00:51 At least that's the way efficient markets work.

00:54 Yeah, I mean, so okay, South Korea bans short selling and you have Twitter just lighting

01:00 on fire here.

01:01 A lot of people don't understand market structure.

01:04 They don't if they're like out here talking about banning short selling.

01:09 Because we've went through this before.

01:10 We understand how markets work.

01:13 I want to say why short selling is essential.

01:15 We're not talking naked short selling here, people creating stock out of the blue.

01:20 We're talking about the other side of the bet.

01:23 And what you have in this market, when you want to buy a stock, when you go out there

01:27 and Tim Quass is going to have on and we'll bring him back into this conversation maybe

01:31 afterwards.

01:32 This will be a good conversation for him to share his thoughts as well.

01:35 But what we have in the market is when you're going out to buy a stock, typically it's a

01:45 short seller selling you that stock, a market making short seller.

01:49 So Tim's got the stats, it's like 55% short volume, 60% short volume.

01:55 That's how much it's high.

01:56 So and we can bring Tim into this conversation.

01:58 We should maybe save it for Tim at 835.

02:00 I almost want to.

02:01 But I'll just give my quick thoughts, quick four points and then we can get Tim's thoughts

02:05 later.

02:06 The number one thing is short sellers provide the market liquidity to keep markets efficient.

02:12 Without short selling, stocks would create bubbles.

02:16 Banks have a lot less equity on both sides.

02:19 People firmly believe that if we ban short selling stocks go straight up.

02:25 And we did this, so we have some evidence here.

02:27 In 2008, when banks were all going basically bankrupt, not because of short sellers, but

02:34 because they lent money to people who couldn't pay off their mortgages and they had a lot

02:40 of bad loans in the books.

02:41 That was the financial crisis, obviously built off housing when the housing prices went down.

02:46 In 2008, we banned short selling for three weeks and on financial stocks only.

02:51 What happened that day was a lot of stocks, a lot of banks really popped up.

02:56 That evening, actually, I can remember trading.

03:00 There was buy in balances across the board for a lot of banks, Joel.

03:03 And I don't know if you can remember this.

03:06 And I remember saying to other traders at Bright, I'm like, we can't short stock.

03:10 So who's providing the liquidity to stop these stocks from gapping up on the close?

03:16 So what I did was, I went and bought a whole bunch of banks too on the close, because I'm

03:19 like, there's nobody to sell to them.

03:21 And what happened was a lot of the close, a lot of stocks gapped up 10% on the close.

03:24 On no news, just boom, banks gapping up, gapping up, gapping up.

03:29 So they had all this, so everybody's like, oh, it's a party, look at the banks coming

03:31 back, it's all good.

03:32 You know what happened three weeks later?

03:34 Banks collapsed in price because there was no other buyers left.

03:38 So that first day, they rallied, and then they collapsed.

03:41 And at the end of the day, the S&P was down 18% after the ban, and I blame the ban for

03:47 that.

03:48 Financials were down 23% after the ban.

03:50 I did a study, so I know those stats.

03:52 So during that three-week period, the financials actually underperformed the market over that

03:57 three-week period.

03:58 So you may get that one day, oomph, pop, but eventually that pop fizzles out.

04:03 Because what happens is when you're short a stock, you now become the buyer for the

04:07 stock.

04:08 So when a stock is going straight down, everybody's scared.

04:12 Momentum traders, oh, don't touch it, don't touch it, don't buy it.

04:14 So there's no, who is the person that comes in to actually step up and buy the stock first?

04:20 It's a short seller, because they're closing the trade.

04:23 So you see a stock just crashing, it's like, ooh, I'm going to make my money, I want

04:26 to get my bids in there.

04:27 So the bids come in and actually support the stock.

04:30 So all short selling does is provide the essential liquidity to keep markets efficient, keeps

04:35 bubbles in check, and it's the majority of your market's liquidity.

04:39 It's provided by market making short sells.

04:41 So and even retail traders, in that way.

04:44 So we'll bring Tim Kwast, and those are my quick thoughts.

04:47 Yeah, I just want to address a question from the chat here.

04:51 Jason Lee, thanks for joining us, Jason.

04:53 I don't know if I've seen you here in the chat before.

04:57 How is buying puts different from a naked short?

04:59 Well, there's a lot of different ways.

05:02 First of all, you have to be enabled to short a stock in your account.

05:06 You have to borrow that stock, right?

05:08 So you have to, there's a payment that's associated with, you know, an interest associated with

05:15 borrowing that stock to short it.

05:18 Second of all, you have, when you short a stock, you have unlimited risk.

05:24 The stock can go as high as it's, you know, whatever, to infinity and beyond.

05:29 Finally, you know, with puts, when you buy puts, you have a defined loss.

05:34 If you pay $300 for a put on something, then the worst you could lose is the $300.

05:41 Also with buying puts, I mean, you know, you got to get your timing right.

05:46 You have to, you know, you have to make sure your strike is close enough.

05:50 So there's really the big differences for being a naked short seller as opposed to buying

05:57 puts.

05:58 A lot of people come on, they say I'm short the stock because they bought puts.

06:00 That is just not true.

06:01 It's a completely different trade.

06:03 So it kind of is my pet peeve when I say I'm short the stock via puts.

06:07 Now you're betting on the short side, but you're definitely not short the stock.

06:10 It's not the same.

06:11 So I short stocks every single day, keeping markets efficient.

06:15 I feel like I do a job by providing liquidity to the market.

06:18 And I think there's other short sellers and other people that understand that without

06:22 short selling, market liquidity would drop substantially and you would have a lot more

06:26 price impact getting into and out of stocks.

06:28 You're seeing stock spreads go from like this to this without short selling.

06:31 And that's not good for anyone.

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