Global Trends

The Country That Banned Short Selling and Made Things Worse

On 5 November 2023, South Korea’s Financial Services Commission held a press briefing. Chairman Kim Joo-hyun described what regulators

By Malvin Simpson

August 18, 2026

The Country That Banned Short Selling and Made Things Worse

On 5 November 2023, South Korea’s Financial Services Commission held a press briefing. Chairman Kim Joo-hyun described what regulators had found: massive illegal naked short selling by global investment banks, a grave situation that was undermining fair price formation and hurting market confidence. Effective the next morning, short selling on all stocks listed on the KOSPI, KOSDAQ, and KONEX exchanges would be banned.

The KOSPI index jumped 5.66% in a single day. Retail investors, who had spent years complaining that institutions were manipulating their stocks downward, celebrated. The government called it a necessary intervention to level the playing field.

Within weeks the rally faded. Foreign investors began pulling back. Analysts started describing the Korean market as less transparent and less attractive than before. The ban, originally set to end in June 2024, was extended to March 2025. Then extended again. It finally ended on 31 March 2025, sixteen months after it began, making it the longest short selling ban in South Korean history.

Whether it achieved anything is a question the data answers fairly clearly.

What Short Selling Actually Is

Before getting into what went wrong, it is worth being precise about what short selling is, because it is one of the most misunderstood mechanisms in financial markets.

A short seller borrows shares of a company, sells them at the current price, waits for the price to fall, buys them back cheaper, returns them to the lender, and keeps the difference. It is a bet that a stock is overvalued. Short sellers profit when they are right.

The reason regulators and academic economists generally defend the practice is not that they enjoy watching stocks fall. It is that short sellers perform a function: they push prices toward reality. When a company’s shares are trading above what its fundamentals justify, short sellers apply downward pressure that corrects the overvaluation. They also do something governments rarely acknowledge, they expose fraud. Enron, Wirecard, Luckin Coffee: short sellers identified all three as fraudulent before regulators did.

The Brookings Institution, reviewing the US experience after the 2008 ban, put it plainly: short selling bans do not prevent declines in financial stocks, but they do impose significant costs on capital markets. The US banned short selling of financial stocks in September 2008. The prices of those stocks kept falling. The ban was lifted early.

South Korea’s Specific Problem

South Korea’s 2023 ban had a more specific trigger than most.

Regulators had uncovered 211.2 billion won, approximately $156 million, in naked short sales by nine global investment banks between 2021 and 2023. Naked short selling is different from regular short selling: it involves selling shares you have not borrowed and cannot confirm you can borrow. It is illegal in South Korea, the US, and most developed markets. Credit Suisse had the largest exposure at around 50 billion won. Nomura Securities was also implicated.

The FSC’s logic was straightforward. The system designed to catch naked short selling was not working. Global banks had exploited the gap between what institutional and retail investors could do in Korean markets. A ban would give regulators time to build a monitoring system capable of detecting violations in real time.

That is a reasonable premise. The problem was execution and duration.

What the Ban Actually Did

South Korean shares rallied after the ban was imposed in November, but the gains soon faded. Critics said it makes the market less transparent, and less attractive to global investors.

The issue is structural. Short selling is not just used by speculators betting against companies. It is used by institutional investors to hedge long positions, by market makers to manage inventory, and by arbitrageurs keeping prices consistent across related instruments. When you ban it, those participants either stop trading Korean stocks entirely or find the market too expensive to operate in. Volume falls. Bid-ask spreads widen. The market becomes shallower.

The spreads between bids and offers as well as the volatility of these stocks increased dramatically during the ban. This was the US experience in 2008, and it repeated itself in South Korea.

Foreign investors, who tend to be the most active short sellers in emerging markets, were caught directly in the crosshairs. Several large global investment banks were fined by the country’s Financial Supervisory Services. The message to international capital was unambiguous: Korean regulators viewed foreign institutional activity with suspicion and were willing to ban entire market mechanisms to address it.

South Korea has been trying to get its stock market included in the MSCI World Index for years, a reclassification from emerging to developed market status that would unlock hundreds of billions in passive investment flows. MSCI repeatedly cited concerns about market accessibility and short selling restrictions as reasons for declining the upgrade. The 2023 ban added to that track record rather than improving it.

The Escalation

What made the South Korean case unusual was not just the ban but what came after it.

When the ban proved insufficient to satisfy retail investor demands and regulators extended it beyond June 2024, the government also proposed penalties for illegal short selling so severe they attracted international attention: fines of up to six times the profit from unlawful short selling, and in extreme cases, life imprisonment.

South Korea announced it would extend its ban on short selling to the first quarter of 2025. “The ban on short selling will be extended until March 30, 2025, to establish an electronic system to prevent naked short-selling and relieve concerns about such practices hindering fair pricing in the securities market,” the Financial Services Commission said.

The life imprisonment proposal drew reactions ranging from disbelief to genuine concern from market participants. No other developed or major emerging market economy has attached criminal penalties of that severity to short selling violations. The signal it sent was that South Korea’s market was operating under rules that could not be predicted or relied upon.

This Was Not New

South Korea’s 2023 ban was the fourth time it had taken this approach in fifteen years.

The first ban ran from October 2008 to May 2009, during the global financial crisis. The second ran from August 2011 to November 2011, during the Eurozone debt crisis. The third covered all stocks during the COVID-19 crash from March 2020, with the ban eventually extended across multiple phases. The fourth, triggered by the naked short selling scandal, lasted sixteen months and became the longest in the country’s history.

The shorting ban for financial stocks lasted longer than in any other country, and the ban for nonfinancial stocks lasted longer than in any other country except for Greece. After the 2008 ban was finally lifted in 2013 for financial stocks, academic research found no evidence that it had reduced volatility or improved liquidity. The market moved with broader conditions, not with the presence or absence of short sellers.

South Korea Was Not Alone

The reflex to ban short selling during market stress is almost universal, and almost universally counterproductive.

During the 2008 financial crisis, the US banned short selling of financial stocks. The stocks kept falling and the ban was lifted early. During the 2011 Eurozone debt crisis, France, Italy, Spain, and Belgium all banned short selling of financial shares. The European ban on short selling is worse because it is inconsistent. Most countries in Europe did not participate in the ban, and the four participating countries applied different definitions of financial stocks. A trader at Hobart Capital Markets described the effect at the time: “Every time they do short selling bans, it exacerbates the problem because people flee risk assets.”

During COVID-19, Austria, Belgium, France, Greece, Italy, and Spain all imposed bans. Austria, Belgium, France, Greece, Spain, and South Korea extended the ban for extended periods. Academic research published after the fact found that the bans undermined market efficiency and created arbitrage opportunities rather than eliminating them. Spain and Italy’s index futures showed significant underpricing during the ban period, meaning traders with access to derivatives were profiting from the restriction at the expense of investors who could not hedge.

The one finding that complicates the picture slightly came from a CEPR study of the 2020 bans: the ban produced a mild but significant reduction in spreads overall, and we can infer that banning short sales led to an improvement in liquidity in certain specific market conditions. But by the time the bans expired, stock markets had largely recovered and thus the restrictions were deemed unnecessary.

What It Says About Market Regulation

The recurring pattern across these cases reveals something about how governments think about financial markets under pressure.

Short sellers are an easy political target. When a stock falls and a short seller profits, the narrative almost writes itself: speculators caused the fall, the ban will protect ordinary investors, the market will recover. It is a story that fits neatly into a news cycle and satisfies retail investors who feel disadvantaged by institutional players.

The academic literature tells a different story. Studies of the US, UK, France, Spain, and South Korea consistently find that short selling bans worsen liquidity, widen spreads, increase volatility in some measures, and fail to prevent the price declines they were meant to stop. When you remove the participants who are most active in pushing prices toward accurate values, you do not get a more stable market. You get a less informed one.

South Korea’s case is the fullest illustration of where this logic leads. A legitimate regulatory problem, naked short selling by global banks, was addressed through a blunt instrument that punished the entire market. The rally lasted days. The consequences lasted sixteen months. The MSCI upgrade remains elusive. And the government’s response to the ban not working was to extend it, threaten life imprisonment, and repeat the exercise.

The ban was lifted on 31 March 2025. The KOSPI is still classified as an emerging market.