Resumption of short selling brightens prospects for blockchain-based P2P exchange platform

Lim Chang-won Reporter() | Posted : April 21, 2021, 15:03 | Updated : April 22, 2021, 07:52

[Yoo Dae-gil]

SEOUL -- A negative perception is still rampant among retail investors in South Korea's stock market over short selling that refers to the sale of borrowed shares in the hope of making a profit from a price fall by buying the shares back at a lower price. Shorting is much riskier than buying stocks, or what's known as taking a long position.

Some individual investors supported the permanent abolition of short selling in South Korea after a government financial watchdog banned the trading technique in 2020 to ease market volatility caused by a COVID-19 pandemic that prompted foreign investors to take profit through shorting. The temporary ban will be lifted on May 3.

The ban has grounded the pioneering service of a blockchain-based peer-to-peer (P2P) exchange platform for securities borrowing and lending that was launched by Directional in a market where retail lenders do not receive a true value for loaned securities with borrowers having very limited access on the lending pool.

Directional's platform offers fair opportunities in lending and borrowing securities. Lenders can have fair compensation, while borrowers can secure more balanced investment opportunities using short selling. "The past year has been tough, but it's been an opportunity to grow," Directional CEO Lee Yun-jeong said in an interview with Aju Business Daily.

"We've had a difficult time internally. On the other hand, we were able to become more mature," Lee said, adding that as its first step, the company would open a virtual share lending service before activating actual transactions. Securities lending is the practice of loaning shares to other investors and requires the borrower to put up collateral.

"I hope it will serve as an opportunity for users to get used to and feel interested in share lending," Lee said, vowing to overcome a deep-rooted perception among retail investors who have criticized short selling for fueling price declines and running against their interests. Short selling has been a tool for institutional investors to hedge their exposure against sharp volatility.

Discussions with partner securities firms that hold accounts have yet to be completed, Lee said. "First of all, we will provide users with virtual stock loan transactions," she said. "The primary goal is to make domestic investors who are not yet familiar with stock loan transactions engage directly in trading and have fun earning profits from them."

The simulated trading service is a win-win strategy for both borrowers and lenders because it is an extra revenue model as investors who own stocks can earn a lot of interest by utilizing idle stocks, Lee said. The interest rate can be determined through consultation with borrows, and lenders can check how much interest income has been added every day.

"Our goal is to make sure that lenders can have the fun of making money," Lee said. "We hope that the retail short selling market itself will be revitalized as more borrowers feel fun to make money through our service."

Directional's original service requires only cash collateral, but Lee changed her mind to allow investors to provide stocks as collateral. A borrower can simply borrow shares by entering the desired interest rate and quantity. The virtual balance will be up to 30 million won ($26,842), and yields can be checked in real-time as soon as transactions are concluded after borrowing.

Lee said that the mock trading service is designed to break the prejudice against short selling. "U.S. and Japanese stock markets, which opened short selling, rose more than the South Korean market. The activation of short selling does not lead to a stock market fall. I think it's different to hear it in words and to know it from experience."

In May, Lee would come up with a new platform that provides information about what shares users should sell. "We are working with fintech companies, which have long provided resources to institutional investors," she said. "We will guide investors to events, such as earnings announcements and the current status of overseas stock markets to help them make rational investment judgments. The service will stand out in markets based on performance, not liquidity."

Lee's entrepreneurial motivation originated from the fact that the proportion of short-selling among retail investors was low due to the absence of a proper system. "The fact that many stocks remained idle means that share lending itself was not well known," she said.

The loan pool service provided by some securities firms does not guarantee a high-interest rate because of commissions, while Lee's platform is more flexible. "First of all, the loan pool should be bigger to increase the number of people trying to borrow stocks and grow the short selling market," Lee said.

(This story was based on an interview conducted by Aju Business Daily reporter Yoon ji-eun)
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