Retail investors hell-bent on watching stocks go up have made life miserable for short sellers around the world.

In South Korea, the government is piling on too.

Lawmakers who oversee the country’s $2 trillion stock market are discussing plans to extend one of the world’s longest bans on short selling, amid pressure from mom-and-pop punters who drive more than two thirds of daily trading.

Calls to make the 10-month ban permanent are mounting. More than 203,000 people have signed a petition imploring President Moon Jae-in to make short sales illegal -- crossing a threshold of 200,000 that compels him to provide an official response. Moon’s prime minister has already called the practice “undesirable.”

While much of the financial world has been watching every twist and turn in the fight between retail investors and short sellers over GameStop, South Korea has quietly become a major battleground in the on-again, off-again debate over the role of bearish trades in stock markets.

With national elections due early next year, policy makers in Seoul are reluctant to anger thousands of Koreans who’ve become infatuated with trading equities during the pandemic. The head of one Korean retail investor advocacy group has called short selling “evil” and organized a protest against the practice outside government buildings. Meanwhile, the International Monetary Fund has urged South Korea to end its short-selling ban, saying it risks making the market less efficient and tougher to hedge.

“Since financial conditions in Korea and the functioning of the market following the Covid outbreak have now stabilized, we believe that conditions are in place to move to reinstate this practice of short selling,” Andreas Bauer, an official at the fund, said at a virtual press conference on the Korean economy on Thursday.

Like other countries, South Korea saw its stock market plunge in March as the pandemic intensified. Share prices then bottomed out three days after the short-selling ban took effect, aided by a flood of central bank liquidity and retail buying. The country’s benchmark Kospi index finished 2020 with a 31% gain, the best performance worldwide after Nigeria’s equity gauge. The Kospi has climbed another 6.8% so far this year.

While other markets including France and Italy also instituted short-selling bans around the same time, South Korea is now the only country apart from Indonesia to have stuck with the restriction.

One research paper covered extensively by local media has helped fuel popular anger toward short sellers. Authored by professors at Hanyang University in Seoul, it showed that short sellers in Korea -- most of them foreign investors -- collectively made an average $2 million in profit per day from 2016 to 2019. Investors who traded on margin, the bulk of whom were retail punters, lost an average $900,000 per day.

“Short sellers are Korea’s Axis of Evil,” said Jung Eui-jung, chief executive of the Korea Stockholders Alliance, evoking the phrase made famous by US President George W. Bush. Jung’s organization is lobbying the South Korean government to ban short-selling permanently if it can’t find a way to make the practice “fair” for retail investors.

It’s unclear whether policy makers would ever go that far. Previous market-wide bans against short selling, during the 2008 global financial crisis and 2011 European debt crisis, lasted for only a few months at a time, although restrictions on bank stocks remained in place for several years.

In 2016, a ruling party lawmaker tried to prohibit short selling for shares in the startup Kosdaq index but failed. And in 2018, after Goldman Sachs Group was fined 7.5 billion won ($6.7 million) for so-called naked short-selling, investors rushed to back petitions calling for short sales to be banned, but the number of signatures never reached today’s levels.

For now, lawmakers are discussing a plan to keep the ban in place through June. They’re also working on legislation that will toughen punishments on naked short selling -- in which investors execute a bearish bet without having first borrowed shares -- and bring short-selling rules for retail and institutional investors more in line.

“Some Koreans don’t understand the mechanism of short-selling and don’t agree with the practice of selling something that she or he doesn’t own,” said Lee Hyo-Seob, research fellow at the Korea Capital Market Institute. “It doesn’t help that the fines levied on institutional investors who are insider trading or manipulating stock markets through short selling. (Bloomberg)