KRX scrutinises market makers’ short selling practices

29-Oct-2020 Intellasia | KoreaTimes | 6:02 AM Print This Post

The nation’s bourse operator Korea Exchange (KRX) is currently overhauling market makers’ internal monitoring and controls, particularly with regard to their short-selling practices. Market makers are financial companies that the KRX designated as providing ample liquidity to stock markets, as they buy and sell stocks on a regular basis.

Currently there are 22 market makers, mostly major securities firms, allowed in the KOSPI, KOSDAQ as well as derivative markets operated by the KRX. They assume the roles of market makers by regularly buying and selling 842 stock items and 206 derivative products as of last Thursday.

KRX announced Wednesday that it is closely looking into every firm designated as a market maker, focusing on any cases of naked short selling ? short selling without borrowing shares ? and violations of the Uptick Rule ? a rule that requires short sales to occur at a higher price than previous trades.

To achieve the goal, the state-run bourse operator has received related documents from market makers. The KRX plans to further scrutinise the stock-borrowing process for short selling and related systemic processes, aiming to complete the investigation by the end of this year. For any market maker found to have violated the rules, the KRX said it will take stern measures according to regulations.

Prevalent illegal short-selling practices

The move comes as some retail investors expressed concerns over market makers’ unsound short-selling practices.

For now, only market makers are allowed to engage in short selling, while all other investors have been prohibited from short selling since mid-March.

Short selling is temporarily prohibited until next March to ensure local stock markets’ stability, with the exception of market makers. Retail investors have long protested against such practices, saying it creates an unlevel playing field for them. Some even raised conspiracy claims about a possibility that global securities firms have been involved in unsound short-selling practices.

According to ruling party lawmaker Kim Byung-wook, 95 percent of financial institutions caught engaging in illegal short-selling practices during the past four years were global financial firms. Most frequently they were engaged in naked short selling.

Raising market trust by thorough supervision

Simultaneously, the stock market operator has also strengthened its market monitoring of abnormal trading patterns to root out any illegal attempts to disturb the markets.

According to the KRX, some of the problematic practices include deliberately asking for higher buying prices with hundreds of different prices to induce stock prices’ increase. Another is submitting massive orders at the highest possible price ? which is a 30 percent increase ceiling for each stock item per day ? to intentionally lead volatility interruption measures during trading, so that the stock can catch other investors’ attention and purchases, while canceling out their original orders.

Some other cases show some people posing as financial investment advisers, urging people to purchase stocks in which they own equities. Another typical case is a firm’s high-ranking officials ? like a CEO or head of research ? selling stocks using inside information.

“The market monitoring committee of the KRX plans to prevent any unfair stock trades, while it immediately investigates abnormal trading patterns and notifies financial authorities,” an official from the KRX said, adding it will attempt to strengthen communications with market investors to operate the stock markets as squarely as possible.


Category: Korea

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