Last year was a frustrating one for many investors outside the ASX blue chips, so when news broke that South Korea was banning short selling, debate was reignited among the executives of some beaten-down companies as to whether Australia should do the same. That would be a bad idea.

In November, the South Korean regulators announced they would ban short selling, the practice whereby one profits from a falling share price, until June 2024. They claimed that “short selling makes it difficult to form fair prices” and is “highly likely to hurt individual investors”.

The film Dumb Money dramatised the GameStop short-selling squeeze. Comedian Pete Davidson (left) plays the dropkick brother of the GameStop craze instigator Keith Gill. Paul Dano is in the latter role.Credit: Roadshow Films

The following day, the South Korean market jumped 5.7 per cent – the largest single day gain in more than three years.

Our benchmark ASX index was only up 7.8 per cent in 2023 despite a greater than 24 per cent rise in US markets. The more speculative end of the market, where more retail investors play, was down still down on the year, with lithium and critical minerals stocks hit especially hard.

In December, Alex Dorsch, the CEO of Chalice Mining, came out in support of a Korean-style ban in Australia, arguing it was “in the national interest”. Coincidentally, Chalice’s shares are highly shorted, with the latest data from the Australian Securities and Investments Commission showing that 6.5 per cent of the company’s shares are held short.

It’s fair to say that Dorsch feels his Chalice has been poisoned by short sellers. He argues that pre-revenue companies (also known as loss-making companies) such as his, should be protected from “geopolitical opponents” who might try to stymie the development of Australian miners by shorting them out of business.

Shares in the critical mineral’s developer were down more than 73 per cent in 2023 and are already down another 30 per cent since the beginning of this year. The catalyst, a more than 25 per cent plunge in a single day in August 2023, when Chalice released a scoping study that contained rather optimistic assumptions for the future price of the palladium to be produced by a prospective mine.

In the same way bulls take long positions when they believe a company is undervalued, short sellers identify companies they believe to be overvalued.

If your company has been the target of short selling, or if you are an investor of a stock that has been underperforming because of short selling, the idea of banning it is tempting indeed. But short selling plays a vital role in price discovery, hedging and liquidity.