Short selling returns to South Korea: A new era of oversight

Key Takeaways

• Widespread naked short selling and a lack of regulatory controls prompted the government of South Korea to impose a ban on short selling in 2021.
• Having implemented a robust regulatory framework designed to restore investor confidence while maintaining market integrity, the ban was lifted in May 2025.
• The new system requires institutional investors to secure a unique registration number to ensure that only authorized entities with robust internal controls can engage in short selling.
• Investor education and effective enforcement of the new regime, supported by appropriate technological solutions, will help restore trust and attract institutional and retail investors.

In May 2025, after a 17-month suspension, short selling fully resumed in South Korea’s stock markets. The ban, which began in November 2023, was initially imposed in response to growing concerns over naked short selling. Now, with a suite of new regulatory tools in place, the Korean government is aiming to restore investor confidence while maintaining market integrity.

Why the ban was introduced

The roots of the ban lie in a series of high-profile investigations that uncovered widespread naked short selling. Unlike legal short selling, where traders borrow (or make arrangements to borrow) shares before selling them, naked short selling involves selling shares without first securing them. This high-risk practice can distort market prices and undermine investor trust.

In South Korea, the issue was particularly acute. The South Korean regulatory framework at the time lacked real-time monitoring tools, and many institutions operated with inadequate internal controls. The problem rose on the political agenda following the expansion of retail investment during and after the COVID-19 pandemic. This growing movement (dubbed “ant investors”) came to view short selling as a tool to benefit large institutions at the expense of individual investors. Public outcry and political pressure mounted, prompting the Financial Services Commission (FSC) to impose a blanket ban. Unlike previous bans, which had been imposed in periods of market turbulence (like the 2008 financial crisis, or the height of the COVID-19 pandemic), the regulator used this pause to overhaul the systems around short selling.

A new regulatory framework

The lifting of the ban marks not just a policy shift, but the introduction of a fundamentally new approach to market oversight. At the heart of this transformation, is the short selling registration number system.

Under this system, institutional investors must apply for a unique registration number from the Financial Supervisory Service (FSS). This number is tied to their trading accounts and must be included with every short sale order. The goal is to ensure that only authorized entities with robust internal controls can engage in short selling.

These registration numbers feed directly into the Naked Short Selling Detection System (NSDS) – a real-time monitoring platform that tracks all short sale orders across the market. If an order is placed without a corresponding stock loan, the system flags it immediately. This level of transparency and traceability is unprecedented in Korea’s financial markets.

Institutions are now also subject to stricter reporting requirements and lending limits and must undergo annual compliance audits. These measures aim to level the playing field between institutional and retail investors, while deterring future misconduct.

The new framework is part of a wider regulatory trend across the APAC region. Other major markets, such as Hong Kong and Singapore, have implemented similar regimes around short selling. Although implementation varies, markets tend to follow similar key principles. These include understanding exactly who is carrying out short strategies using unique investor identifiers, ensuring short orders and trades can be identified using tags, and maintaining a real-time view of short positions across the market through active monitoring.

Looking ahead

The long-term impacts of the return of short selling on South Korean markets remain unclear. Regulators will be hoping to see increased confidence, and growing volumes from international institutions and domestic retail investors. The key question is whether the new oversight regime can successfully fulfil political demands for effective regulation and market integrity, without deterring investment. Ultimately, the success of this new system will depend on enforcement and investor education. If regulators can maintain transparency and fairness, short selling could once again serve its intended purpose: improving price discovery and market efficiency.

For brokers, it’s a significant challenge to ensure that they remain compliant with the new short selling regulations and continue to provide confidence for their clients. However, controlling costs and operational overheads remains a perennial concern. Effective technological solutions are vital, and partnering with vendors that combine in-depth knowledge of the unique South Korean regulatory environment with a global perspective is key to delivering compliance efficiently.

As South Korea enters this new chapter, domestic and global market participants will carefully monitor the impacts of short selling’s reintroduction.