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FSC tweaks stock trading rules

Regulations focus on oversight, short-selling after Samsung mistake
May 29,2018
Financial authorities in Korea laid out measures to better oversee stock trading, a follow-up to the so-called fat-finger trading error by Samsung Securities.

“We will minimize the possibility of accidents on the stock exchange by adopting a systematic verification system on stock balance and trading volume in each stock trading process,” said the Financial Services Commission (FSC), Korea’s top financial regulator, in a press release on Monday.

Measures introduced included making it obligatory for securities firms to review the balance of existing stocks before the market opens and match them with the balance owned by different groups of investors on a daily basis.

The government said it will establish a real-time monitoring system that will enable the financial authorities to track the stock balance on the market. The government is also adopting what it dubbed an “emergency button system,” which would cancel any dubious transactions immediately.

“The market chaos and sudden fall in stock prices were caused by the concentration of massive selling [in a short span of time] with the securities company unable to freeze the sale as soon as possible,” explained the FSC.

In early April, a trader at Samsung’s brokerage arm mistakenly distributed 2.81 billion company shares to employees.

Among those employees, 22 decided to sell their sales and 15 of them managed to sell 5.01 million shares in a span of 31 minutes. The price of the company’s stocks plummeted by 12 percent, leading investors to panic sell throughout the day.

The government, however, did not ban short-selling or introduce measures to further regulate it. Short-selling came under scrutiny because the way the employees of Samsung Securities sold off their stocks resembled an illegal investment practice called “naked short-selling.”

In naked short-sales, traders short-sell securities without actually borrowing them and determining they exist. Only the form of short-selling where traders borrow the shares before shorting is allowed in Korea.

“Short-selling is an investment technique that’s widely in use globally and it’s difficult to ban it completely given its price discovery function and market efficiency,” the regulator explained in the press release. “Instead, we reviewed the existing short-selling regulation and improved the policy by expanding the monitoring effort.”

Instead of banning the practice, the regulator said it will make short-selling more accessible to retail investors.

Currently, short-selling by retail investors is limited to securities and finance stocks and the trading firms that enable such trading are short in number. The FSC said it will expand the number of securities that retail investors can short-sell.

Also on Monday, the headquarters of Samsung Securities in Seocho District, southern Seoul, was raided prosecutors, the latest development in the investigation into the scandal. The Seoul Southern District Prosecutors’ Office reportedly confiscated documents and digital files from the office.


BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]