Stock lending balance hits six-year high amid prolonged market volatility

The number of shares on loan, seen as a leading indicator for short selling, has surged to its highest level in about six years since COVID-19. Market watchers attribute the increase to growing demand for bets on further declines, as concerns mount that volatile conditions will persist due to the war in the Middle East. According to the Korea Financial Investment Association (KOFIA) on the 16th, the number of shares on loan in the domestic stock market stood at 3,115.57 million as of the 13th. This is the highest level since March 26, 2020, when it reached 3,141.06 million shares.
In value terms, the stock lending balance came to 144.6411 trillion won, down slightly from the record high of 157.9298 trillion won on the 26th of last month. However, it has increased by more than 17 trillion won compared with October 4, when it was 127.3417 trillion won and the market had tumbled 12%. The fact that the total value has fallen while the number of shares on loan has risen suggests that lending demand has spread from mainly large-cap stocks to small and mid caps. In fact, this month the stock lending balance on the Korea Composite Stock Price Index (KOSPI) market fell by 1.2829 trillion won, while the KOSDAQ (Korean Securities Dealers Automated Quotations) market saw an increase of 531.6 billion won. The KOSPI, which had climbed above the 3,000-point level late last month, plunged 13% this month amid fallout from the Middle East conflict, whereas KOSDAQ fell only 2.48%, a relatively smaller drop. As a result, investor sentiment seeking to hedge against further declines appears to have shifted toward small and mid-cap names on KOSDAQ.
Among the stocks that saw notable increases in lending balances this month, nuclear power and telecom equipment names ranked near the top. Woori Technology, considered a nuclear power play, recorded the largest increase, with 3.663801 million additional shares on loan. As oil prices swung sharply on the back of the Middle East war, nuclear power stocks, which are seen as less exposed to geopolitical risks, emerged as beneficiaries in the market. KMW, a telecom equipment stock, also saw its lending balance jump by 2.29085 million shares. The stock drew attention as a potential beneficiary of the full-scale rollout of 5G standalone (SA) networks, after AT&T announced it would invest about 370 trillion won over the next five years to expand 5G, fiber-optic and satellite communications infrastructure across the United States.
Stocks included in the KOSDAQ Active ETF launched on the 10th by Samsung Active Asset Management also saw their lending balances rise. For auto parts maker Sungwoo Hitech, the number of shares on loan increased by 1.156862 million this month. Within the portfolio of the KoAct KOSDAQ Active ETF, Sungwoo Hitech accounts for 2.77%, a relatively high weighting.
Brokerages are warning investors to be cautious about the potential for further volatility. Lee Sang-heon, Head of Research Center at iM Securities, said, "Until the end of last month, the domestic stock market was mainly driven by liquidity conditions and semiconductor earnings. Since the outbreak of the Middle East war, however, interest rates, oil prices and the exchange rate have all risen together, creating an environment in which the market is far more sensitive to macro indicators." He added, "Investors should be cautious until the strength in these three indicators subsides. In particular, KOSDAQ, which has fallen less than KOSPI this month, is much more vulnerable to weak macro data and could see heightened volatility."
Stock lending balances represent shares that long-term institutional holders lend to other investors in return for a fee, and are generally regarded as a leading indicator for short selling. In a short sale, investors borrow shares through stock lending, sell them first, and then buy them back at a lower price if the stock actually falls, returning the borrowed shares. When the stock lending balance rises, short selling typically increases as well, signaling stronger demand for bets on a market downturn.
nodelay@fnnews.com Park Ji-yeon Reporter