Does Short SellingDrive the Drop—or Follow It?

2026.05.27 · ACTUAL MARKETTwo records on the same day

On May 27, 2026, the KOSPI’s reported net short position balanceThe aggregate of investor- and security-level net short positions that exceed Korea’s reporting thresholds. The KRX statistic is formally called the “net short position balance.” Smaller positions below the reporting threshold are not included.reached KRW 22.0697 trillion, the largest value on record at the time.

That same day, the KOSPI closed at 8,228.70—also an all-time high at the time. It was the very day the single-stock leveraged ETFs covered in Episode 07 were listed.

What does the net short balance actually count?

Put simply, the net short position balance measures short positions that have been opened but not yet closed. The position is said to be “open position”.

But it is not a simple total of every short sale. For each investor and stock, the system calculates how many more shares must be returned than are currently held. That difference—thenet short positionA position in which the investor owes more borrowed shares than they own. The difference is the size of the net short position.—is included only when it exceeds the reporting threshold.

Before reading too much into that KRW 22 trillion figure, try this question.

The KRW 22 trillion figure is a market value

The reported net short position balance is published both in shares and in value. The KRW 22 trillion figure that makes headlines is the value: for each stock, the reported share count is multiplied by that day’s closing price and then summed. As the quiz showed, the value can rise even when the number of shares does not.

The same thing had happened four months earlier, on February 3. The reported net short position value was at a record then too—and the KOSPI also closed at an all-time high.

Was the record net short balance
a bearish signal?

After the record was set, the KOSPI kept rising for a little over three weeks and closed above 9,000 for the first time. It then fell more than 38% by late July. But that does not prove the May 27 short-position balance had “called” the selloff. The composition and size of the positions kept changing in the meantime.

A single short-position number cannot explain that entire rise and fall. To read the balance properly, first understand what one short sale leaves behind in the market.

There is more than one way to bet on a decline. You can buy an inverse product, such as the −2× ETF discussed in Episode 07, or borrow shares and sell them first. This episode is about the second method. But first, one question.

The life cycle of a short sale

Short selling means selling shares you do not own. In a covered short sale, you borrow the shares and sell them. Selling first without having borrowed the shares— naked short sellingSelling shares before borrowing or otherwise securing them. It is prohibited in Korea and can carry heavy monetary and criminal penalties.—is prohibited in Korea.

The borrower usually buys the shares back in the market before returning them. The obligation can also be settled with shares already owned or obtained through another route.

Retail investors usually borrow shares through a broker’s retail stock-borrowing serviceA brokerage service through which a securities firm lends shares to retail investors. Institutions and foreign investors mainly use securities lendingStock lending and borrowing transactions used mainly by institutions and foreign investors.transactions. Shares borrowed for short selling generally have 90-day repayment periods that may be renewed, but the total period cannot exceed 12 months.

Buying back: short covering

Buying back shares that were sold short and returning them is called short coveringBuying back shares that were sold short in order to return them. In the market, it appears as buying demand..

When the stock rises, the problem is not just the mark-to-market loss. The borrowed shares become more valuable, which can make the posted collateral insufficient and trigger a margin call. It is the mirror image of the leveraged-long squeeze described in Episode 05: there, falling prices pressure the long account; here, rising prices pressure the short. If short sellers cannot hold on and rush to buy back at the same time, that buying can push the stock higher still. This is a short squeezeA move in which rising prices force short sellers to buy back shares to limit losses, and that concentrated buying amplifies the rise..

An order a short seller generally cannot place

Short selling is subject to a price rule. As a rule, a short-sale order must be quoted above the most recently executed price; if the last price moved up, an order at that same price is permitted. This is the uptick ruleA rule that generally requires short-sale orders to be quoted above the latest execution price. If the latest price moved up, a short sale at that price is allowed. Some transactions are exempt., first introduced in Korea in 1996.

There are exemptions. But mapped onto the order-book ladder from Episode 01, a normal short sale looks like this: when buy orders are stacked below the market, a trader generally cannot use a short-sale order to hit the highest bid, then the next, and directly walk the price down. That kind of aggressive selling is usually done by holders selling shares they own. Short sellers can instead add sell supply above the market, making it harder for the price to rise.

The uptick rule does not mean short selling cannot pressure prices. It limits one specific mechanism: directly sweeping lower bids.

Back to the question in the title: does short selling drive a decline or follow it? It can do either—and there is a third possibility.

In every case, the headline data may say only that “short selling increased” or “the balance fell.” To infer which mechanism was at work, you need intraday prices, each stock’s short-sale share, and the reported share balance side by side. Even then, it is an inference—not proof that short selling caused the move.

Three numbers that look similar—but are not

Short-selling articles repeatedly use three different numbers, and their similar names make them easy to confuse. One is a FLOW measured during the day; the other two are STOCK balances measured at a point in time.

The reported net short position balance can also include shorts that are not outright bets on a stock falling. An investor might buy a related future or ETF and short an equivalent amount of stock as a hedge or arbitrage trade, leaving little net directional exposure. Those shorts can still appear in the balance. That is why calling the entire balance “money betting on a decline” is an oversimplification.

Four checks for short-selling data