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December 10, 2018

Goldman Sachs did attempt massive shorting: reports

PUBLISHED : June 12, 2018 - 15:51

UPDATED : June 12, 2018 - 22:04

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[THE INVESTOR] The Seoul branch of Goldman Sachs International is suspected of massive short selling on May 30 that resulted in naked shorting, which is illegal in Korea, according to local news reports on June 12.

The firm allegedly carried out short selling on an estimated 10 million shares issued by 350 KOSPI and KOSDAQ-listed companies. Out of the shares, 6 billion won (US$5.57 million) were unsettled. Goldman Sachs told the authorities that this occurred because an institutional investor reversed a decision to lend it shares, ultimately resulting in temporary naked shorting. 




In addition to the Financial Supervisory Service, which will wrap up its investigation on June 15, the Korea Exchange is also planning to launch its own probe. Goldman Sachs International is one of 82 member companies of the exchange. KRX could revoke its membership, effectively stopping operations of the Seoul office.

However, industry watchers say it is unlikely for Goldman Sachs to face severe action.  At most, the authorities could impose a penalty of up to 100 million won, but they won’t be able to punish any of the involved employees due to the company’s status as an important foreign investor.

Calls are rising for the government to stop short selling, which retail investors claim forces them to lose money. Short selling is when investors buy stocks with the expectation that prices will fall in the future, in which case they buy them back at cheaper prices to make a profit. Because investors need the stock prices to fall to make money, they manipulate the markets, according to individual investors.

Naked shorting is when investors make such short bets without borrowing the necessary stocks first. 

Recent short selling incidents including Samsung Securities’ “fat-finger error,” in which the brokerage mistakenly deposited 2.8 billion non-existent company stocks into employee accounts in April, reignited a controversy over fairness between institutional and retail investors even though Korea’s top financial regulators have unveiled plans to tighten their control on short selling in stock markets which will be implemented in September.

Currently, brokerage firms hold the responsibility of checking compliance of short selling but face lax regulations compared with other countries such as Japan and Hong Kong where they hold strict responsibilities.

By Park Ga-young (gypark@heraldcorp.com)

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