Plans to Improve Rules on Market Makers & Tighten Monitoring of Illegal Short Sale TradesDec 21, 2020

The FSC introduced measures to improve market maker rules and strengthen detection of illegal stock short-selling activities on December 21 with an aim of boosting accountability in the market and establishing an effective monitoring system for illegal short sale activities.


The National Assembly passed a revision bill to the Financial Investment Services and Capital Markets Act on December 9, which introduces stricter penalties on illegal short sale activities.  Along the same line, the government has prepared the following measures to improve rules on market makers and to strengthen monitoring of illegal short sale activities in order to boost accountability and develop a more effective system for market supervision.



Marker makers quote prices on both buy and sell sides to satisfy the market. The marker maker system was first introduced in the derivatives markets in 1999 and then in stock markets in 2005. Recently, however, there have been concerns about the possibility of the abuse of the system as the trade volume of market makers has grown significantly as well as their short sale orders. In this regard, the Korea Exchange has conducted inspections on market makers’ compliance with short sale regulations, covering their transactions data from January 2017 to June 2020, and has found a few suspicious cases of naked short selling and violation of the uptick rule. To address this problem, the following measures have been drawn up to help restore confidence in market makers and foster their market making function.

a) Introduce restrictions on short sale trades
- Ban market makers’ short selling of mini-KOSPI 200 futures and options (when acting in their capacity as market makers)
- Discontinue the uptick rule exemption for market makers in stock markets to address the issue of unfairness
- Develop an automated monitoring and detection system for naked short selling activities and violation of the uptick rule

b) Encourage trading of low liquidity shares
- Remove stock items from the list of market makers’ transaction items once their liquidity level reaches above a certain level
- Require market makers to buy and sell a certain proportion of low liquidity shares
- Improve the current market maker rebate system to encourage trading of low liquidity shares and disincentivize trading of highly liquid stocks

c) Improve transparency
- Expand disclosure of market maker rules and disclose updated information on market makers’ transactions activities by instrument types
- Regularly disclose detailed information about market makers’ trade orders (buy, sell, short sale, short exempt, etc.) while disclosing market makers’ short exempt orders separately on the daily short sale disclosure
- Strengthen professional qualifications by imposing a one-year license revocation on market makers that have a history of being subject to a fine of KRW10 million or more for a violation of market maker rules


The National Assembly passed the revision bill to the Financial Investment Services and Capital Markets Act on December 9, introducing criminal penalties on illegal short-selling activities, requiring short sellers to keep records of their loan agreements for five years and prohibiting short sellers from participating in equity financing of companies whose stocks they have shorted. In order to ensure a seamless implementation of the revised law, it is essential to set up an illegal short sale monitoring system that can detect unlawful attempts early on.

a) Develop a short sale monitoring system

Currently, asking prices and other information about short sale orders submitted by securities firms to the Korea Exchange are used for statistical purposes only. The KRX is not equipped with the necessary infrastructure to maintain a real-time monitoring of suspicious transactions or unfair trading activities.

As such, a two-tiered short sale monitoring system that first allows the real-time monitoring of bids and other relevant data and then shows the market aggregates of the total size of short orders and top performing items will be developed. In addition, trades data on bulk orders and stock lending will be collected to more effectively monitor suspicious transactions.

b) Conduct inspections more regularly

The current mandatory inspection cycle of once every six months will be reduced to once every month with the possibility of conducting more frequent inspections in the future.

c) Develop alternative detection mechanisms to close loophole

Currently, there exists a loophole in monitoring naked short selling activities if the repurchase of the shorted instrument occurs the same day. To address this problem, short orders by institutional and/or foreign investors whose deposit records do not show at securities firms will be categorized as ‘suspicious orders’ and be subject to a scrutiny by the relevant securities firms and the KRX.

d) Maintain close monitoring on market makers

Currently, market making is carried out through separate accounts and short exempts are allowed only on short orders placed through these accounts. However, there exist concerns about the abuse of this system. As such the authorities will maintain close monitoring on short exempt orders placed by market makers.

e) Set up a new short sale monitoring team

Within the market monitoring committee of the KRX, a special team will be set up to regularly monitor and inspect short sale trades.


The FSC plans to finalize specific details of the measures in close consultation with securities firms. The authorities plan to begin implementing the measures for improving market maker rules within the first half of 2021. With regard to the plans to establish an illegal short sale monitoring system, the authorities will revise the relevant rules and work to ensure that it is ready for operation when short-selling activities resume next year.

* Please refer to the attached PDF for details.