Market making practice to come virtually to a stop in Korea from this week

As many as 13 out of 14 brokerages designated as market makers chose to surrender their role from Monday after the Korean financial authority alerted of a rare heavy fine on nine for alleged irregular practices.

Upon the Korea Exchange (KRX)’s decision to relieve them of the market-making role, 13 signed up for the release. They would be exempted for supervision for their mandatory quoting of bid and offer prices for stocks starting Monday.

Liquidity in 25 billion won ($21 million) worth stocks on the main Kospi market and 100 billion won worth on the secondary Kosdaq would be affected as a result.

Currently, 332 stocks in the Kospi and 341 in the Kosdaq are subject to market making, aimed to smooth flow of liquidity for low circulation stocks and new entrants. Market-making brokerages act to stimulate a target stock’s trade by making two-way quotes or indicating bid and offer price of the stock during trade hours on the exchanges.

Last week, the Financial Supervisory Service notified nine market makers of slapping 48 billion won for alleged stock price manipulation. The financial watchdog has given the brokerages charged for allegedly disturbing the market order a time until Sept. 16 to prove their innocence, which could possible lower their fine amount. The initial deadline was Sept. 10.

Exchange operator KRX last week offered all market makers a temporary exemption of liabilities over fears that the market making system would not work properly until the issue is settled.

FSS has yet to disclose whether it has found any other irregularities during its investigation for the market makers’ “inappropriate” practices. Meanwhile, brokerage houses reportedly plan to file a collective suit against the disciplinary action.

Market analysts do not expect the halt in the market making activities to have an immediate impact on the exchanges but complications may appear in low liquidity stocks.

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