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South Korea’s equity market is experiencing increased turbulence as investors turn to single stock futures to place bearish bets, an unintended consequence of last month’s short-selling ban. Exchange data reveals that futures of certain Korean companies are trading at a discount of up to 6% to their spot prices, as investors seek to hedge potential risks.
Clepsydra Capital analyst Sanghyun Park attributes the discount in futures prices to spot as a result of the absorption of short selling demand. Park anticipates a surge in aggressive arbitrage trading involving futures/spot, potentially contributing to heightened price volatility in the spot market.
Offshore funds are driving the selloff in single stock futures, having sold 185 billion won ($142 million) since the ban, according to exchange data. Contracts that are trading at a discount were also targets of short sellers, primarily overseas investors.
For instance, the single stock futures of BGF Retail Co. and Posco DX Co. expiring in December traded at least 10% cheaper to their spot prices earlier this month before paring losses to 6% as of Nov. 21, according to exchange data. Before the short-selling prohibition, heavy discounts were rare, with only Hanwha Ocean Co. experiencing a significant discount amid an ongoing rights offering.
The government implemented the shorting ban to protect retail investors ahead of next year’s polls. However, the increased volatility in the benchmark Kospi Index has raised concerns about the nation’s appeal to global investors and its bid for developed-market status in MSCI Inc.’s indexes. While the swings have eased since the ban, they remain higher than those of most peers.
Analysts caution that using futures to hedge risks might not be an ideal option for funds seeking alternatives during the shorting ban due to higher costs and associated risks. Samsung Securities Co. analyst Jun Gyun suggests that single stock options could be a better choice than selling futures to avoid potential losses.
