A South Korean regulator defended its decision to temporarily ban stock short selling as necessary to stop unlawful trading, even amid criticism that the move has hurt the market’s appeal among global investors.

“Neglecting rampant illegal short selling makes it difficult to form fair prices in the stock market, and this is highly likely to hurt individual investors, and decrease trust in the nation’s market, which has a high proportion of individual investors,” Kim So-young, the vice-chairman of the Financial Services Commission, said in a rare briefing for foreign media on Friday.

The regulator last month reimposed the ban for stocks in the Kospi 200 Index and Kosdaq 150 Index until the end of June. While similar measures were taken previously to curb pandemic volatility, South Korean retail investors have always been critical of short selling, saying the practice unfairly favours foreign and institutional investors.

The latest prohibition came after authorities in October proposed fines on two global banks for “routinely and intentionally” engaging in naked short selling - or the selling of shares without even borrowing them first - which is illegal in South Korea. Authorities have found more cases of illegal trading since then, Kim said in the Friday briefing.

The ban has raised concerns that it may prevent global index provider MSCI Inc from moving the country to developed-market status from emerging-market. Investors have raised the point that short selling is a common practice in other countries, and is a useful tool for appropriate pricing of stocks.

South Korea has said that eradicating illegal forms of the tactic will improve the overall trading system, thereby eventually regaining investor confidence.

The Kospi 200 has gained 5.3% since the ban was reinstated, while the Kosdaq 150 has climbed 8.2%. That compares with a gain of 4.7% in MSCI’s broadest measure of global stocks.

  - Bloomberg