Stocks with high margin purchases rock Korean bourses

[Photo by MK DB]

Shares of Samchully Co., Daesung Holdings Co. and four other companies plunged by their daily 30 percent limit Tuesday on growing concerns about debt-fueled investing, which involves many contract for difference-hit stocks earlier this week, sparked a firestorm across battery-related stocks that have surged this year.

The other four companies are Sebang Co., Daou Data Corp., Sunkwang Co. and Seoul City Gas Co., according to the Korea Exchange. Of the eight stocks that hit the daily limit Monday due to massive selling from Societe Generale Securities, only two - Harim Holdings Co. and DAOL Investment & Securities Co. - managed to break out of the lower limit. However, the two stocks already suffered significant losses.

Stocks related to batteries also plunged on the day as there were reports that stocks with a high proportion of debt-driven investment were mainly targeted in the selloff. POSCO Future M Co. fell 4.40 percent, EcoPro BM Co. slipped 6.46 percent and L&F Corp. dropped 5.40 percent. As a result, the KOSDAQ, which is dominated by small- and mid-cap stocks, plunged 1.93 percent on Tuesday.

The market is still debating the nature of the CFD trading bomb that triggered the stock market crash. CFD is a type of total return swap (TRS) transaction, which allows traders to settle their profits without owning the actual stock by paying a set margin. A 40 percent margin requirement means you can invest with up to 2.5x leverage.

CFD was first introduced by Kyobo Securities Co. in 2015, but domestic securities firms are only responsible for brokerage and the actual trading is executed through foreign securities firms.

“It is possible that the brokerage firm executed forced margin liquidation after a margin call. Even if there was no clear downward trend the day before, we cannot rule out the possibility that forced liquidation was made in real time depending on the risk,” said an official from a brokerage firm.

The financial investment industry said that the stocks in trouble had a high margin loan ratio and that excessive borrowing caused the plunge in share prices.

Securities firms have taken steps to remove the stocks from their margin loan access or increase margin requirements.