The financial authorities have determined that if a securities firm submits a correction request within the designated deadline after an erroneous purchase, it will not be classified as naked short selling. This marks the first case where a correction measure, traditionally carried out due to simple mistakes following the introduction of the strict Short Selling Central Monitoring System (NSDS), has been recognized. Last year, Korea Investment & Securities and Samsung Securities, which faced allegations of violating naked short selling rules, avoided penalties from the financial authorities.
According to the financial investment industry on the 19th, the Financial Services Commission's Securities and Futures Committee (SFCC) applied an exception to short selling regulations regarding allegations of violations by Korea Investment & Securities and Samsung Securities during its 11th meeting in June. The decision, which had been kept confidential, was recently made public through official procedures, revealing this fact belatedly.
The SFCC stated, "This falls under the short selling exception." It added that "sell orders were placed only for the erroneously purchased shares, a correction request for the erroneous purchase was submitted within the deadline, and thus these can be considered securities to be delivered according to contract; this is the first case of detecting short selling resulting from an erroneous purchase; and it is difficult to argue that there was infringement of protected legal interests due to offsetting trades."
The explanation clarifies that if a securities firm mistakenly purchases stocks (erroneous purchase) but submits a correction request within the deadline (T+1 day), it cannot be deemed illegal short selling. Previously, when erroneous trading occurred resulting in sell orders by mistake, securities firms followed established practice by processing the trade order first and then submitting a post-facto correction report. However, NSDS systematically identified naked short selling, flagging suspicious orders. Short selling is an investment method where stocks are borrowed and sold; if the stock price falls, they are repurchased to profit from the price difference. Naked short selling, which involves selling without borrowing stocks, is inherently illegal.
While the industry had been closely watching whether corrections following simple mistakes would also be subject to penalties, the financial authorities determined this to be an exceptional circumstance.
Earlier, in April last year, Korea Investment & Securities was accused of short selling 54,044 shares (worth 4.55469 billion won) of Hanwha Ocean that it did not own, while Samsung Securities was accused of short selling 33,892 shares (worth 1.9512 billion won) of Samsung Electronics. After being detected by NSDS, the Korea Exchange conducted supervision, and the Financial Supervisory Service carried out an investigation from November last year to March this year. Initially, the Financial Supervisory Service proposed imposing administrative fines of 585.2 million won on Korea Investment & Securities and 346 million won on Samsung Securities when submitting the case to the SFCC.
Meanwhile, the SFCC imposed an administrative fine of 1.016 billion won on Daol Investment & Securities for allegations of violating short selling regulations. From May 2021 to August 2022, it was accused of submitting 534,349 shares (worth 24.17948 billion won) in borrowed short selling orders for 395 stocks, including BNK Financial Group, to the exchange without indicating that these orders were short selling.
Short selling was completely banned in November 2023 following a large-scale illegal short selling incident by global investment banks (IBs), but resumed in March last year. In line with its policy of strongly penalizing illegal short selling, the financial authorities improved related systems, including the establishment of NSDS to fundamentally block naked short selling.
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