South Korea’s retail investor army declares war on short-sellers

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

“It is the past that I want to forget. Back then, I didn’t have much access to information. I was bound to lose in an environment tilted against amateur traders,” said the 62-year-old head of the Korean Stockholders’ Alliance, an advocacy group that represents about 44,000 retail investors.

But the tables have turned over the past year as retail investors have emerged as the dominant force in South Korea’s $2tn stock market, accounting for almost 60 per cent of daily turnover. With that heft, amateur traders have become a political force, seeking to even the odds against professional investors.

Mom-and-pop investors bought a net Won63.9tn of Korean shares last year, compared with a net sale of Won5.5tn in 2019. That helped propel the benchmark Kospi index up 118 per cent following a coronavirus-driven sell-off last March, making it one of the best-performing markets globally.

Almost one-fifth of Korea’s population of 52m dabbles in stocks, and data showed local brokerages have amassed Won76tn in cash deposits.

“The market dynamic is changing fast with individual investors becoming a powerful force that even hedge funds should be afraid of,” said Albert Yong, managing director at Petra Capital Management, a Seoul-based investment firm.

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

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

The “ants” are testing their political power by demanding regulatory changes in the stock market. Some had called for a campaign against ruling party candidates in mayoral by-elections this month in Seoul and Busan, the country’s two biggest cities, and in the presidential vote next year.

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

About 70 per cent of the members of the Kstreetbets forum, which is run by the KSA, are male office workers in their 30s and 40s. Many are investing in Korea’s fast-growing biotech sector and promising future industries such as electric vehicle batteries.

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

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

Short sellers are like the Grim Reaper to many amateur traders

Korea’s regulators have twice extended a ban on short selling introduced a year ago following pressure from retail traders. Amateur investors also persuaded the government last year to drop plans to expand capital gains taxes on retail traders with large portfolios and to amend rules to allow more retail participation in initial public offerings.

Their current target is the partial lifting of the short selling ban, which would allow investors to again bet against large-cap shares from May. Amateur investors believe that the ban has helped the Kospi to rally despite short sales making up only 6.5 per cent of total trades on Korea’s main board in the year before the ban was introduced, according to the Korea Capital Markets Institute. That compared with an estimated 35-40 per cent in markets such as the US, Japan and Europe.

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

International investors argue that short selling is needed to hedge their exposure to Korean stocks and that it can help prevent shares from becoming too overvalued.

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

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

They have also asked the state-run National Pension Service to increase its domestic stock holdings, blaming a recent market correction on the fund’s heavy selling of Korean shares.

“It is a David vs Goliath fight,” said a prominent Kstreetbets member. “We know that our chances of winning the fight against short sellers remain very slim but we will continue the fight against injustice. Then, our children may live in a fairer world.”