Small cap rout continues as leveraged bets on future-focused unwind

A handful of small caps continued to plunge Wednesday, extending a rout that began earlier this week.

Electronic display boards at Hana Bank in central Seoul show markets Wednesday. [NEWS1]

A handful of small caps continued to plunge Wednesday, extending a rout that began earlier this week.

Seoul City Gas, Daesung Holdings, Samchully, Sebang and Sunkwang have slipped 30 percent, the daily limit, for three consecutive days since Monday.

Harim Holdings and Daol Investment & Securities, which plunged 30 percent on Monday, continued to fall throughout the week, but the pace of the drop slowed. Harim Holdings and Daol Securities slid around 5 percent Wednesday.

Most trades went through Societe Generale Securities, a Paris-based financial firm.

Liquidation of Contract for Difference (CFD), a type of equity derivative, and price manipulation may be behind the price decline, analysts say.

CFDs are leveraged derivatives typically used by institutional investors. They allow traders to trade assets without owning them.

Websites for some of the companies crashed Wednesday due to overload.

“Kosdaq stocks with relatively high credit ratios were weak,” said Simon Na, an analyst at NH Investment & Securities, in a report Wednesday. “Balance for Kosdaq loans increased from 7.7 trillion ($5.2 billion) won early this year to 10.5 trillion won as of Tuesday.”

The financial authorities said they will look into the transactions to find out whether there were any unfair trades.

Some of the investors may have unloaded the shares, knowing the financial authorities are about to start the investigation, according to the Financial Services Commission, adding that an investigation will proceed with speed.

“The stock market is abnormally overheating with transactions on credit increasingly centered on future industries, like reusable batteries,” said Financial Supervisory Service (FSS) chief Lee Bok-hyun in an executive meeting Tuesday. Lee ordered a swift investigation into the stocks that may have been traded unfairly.

Ten people linked by authorities to the volatility of the stock prices have been prohibited by the Seoul Southern District Court from leaving the country, according to media reports Wednesday.

Reusable battery stocks, which rallied in recent weeks, were hit after remarks by the chiefs of financial authorities.

Kosdaq-listed EcoPro BM, a cathode material producer, reached an all-time high on April 10. A series of analysts unprecedentedly warned about the overvaluation of the stock, advising investors to “sell” the shares.

Local brokerages raised the deposit ratio required for the trading of volatile stocks from Tuesday, limiting leveraged purchases of some stocks, including Kumyang and Aekyung Chemical.

BY JIN MIN-JI [jin.minji@joongang.co.kr]