Kiwoom trading systems inspected after small-cap rout

Equity derivative trading systems of Kiwoom Securities are being inspected by the Financial Supervisory Service (FSS) after abuses by investors, the regulators suspect, led to a massive selling spree in small-caps last week.

Financial Supervisory Service Gov. Lee Bok-hyun speaks at an event to support the victims of voice phishing in central Seoul on Tuesday. [YONHAP]

Equity derivative trading systems of Kiwoom Securities are being inspected by the Financial Supervisory Service (FSS) after abuses by investors, the regulators suspect, led to a massive selling spree in small-caps last week.

The FSS confirmed the investigation Wednesday and said it is reviewing procedures and internal control systems to find out if any illegal trading may have occurred in transactions involving contracts for difference (CFD) securities on or around April 24.

CFDs are leveraged derivatives typically used by institutional investors. They allow the trade of assets without fully owning them.

"Most of the supply from Societe Generale Securities on the 24th was delivered to Kiwoom Securities," an FSS spokesperson Yonhap.

The authorities will "look into how the work was internally handled relating to the CFDs."

Some stocks that nosedived, including Seoul City Gas, Daou Data and Samchully, hit the daily 30-percent limits for almost a week.

Financial authorities and prosecutors raided the residences, businesses and an office of individuals suspected of manipulating the stock prices. Kiwoom Group Chairman Kim Ik-rae was found to have sold 1.4 million shares of Daou Data two days before the collapse of the stock.

Daou Data plunged 30 percent for three days from April 24. It owns 45.20 percent of Daou Technology, which owns more than 40 percent of Kiwoom Securities.

FSS Gov. Lee Bok-hyun demanded chief executives of domestic brokerages last week manage the risks of CFD trading and refrain from marketing the financial product.

He said competition for CFD trading grew overheated among brokerages to attract customers. This included lowering trading commissions.

CFD trading totaled 70.1 trillion won ($52.7 billion) in 2021, up more than 120 percent from 30.9 trillion won a year earlier. The number of brokerages trading CFDs also rose to 11 in 2021 from four in 2019.

The FSS noted the need to improve the system for the CFDs.

"If CFDs are abused by some speculators in stocks with low liquidity and those in which short selling is prohibited, it could become vulnerable to unfair trading, like matched orders to push up prices," the Financial Services Commission Vice Chairman Kim So-young said Tuesday.

The stock price volatility may not only put investors at risk but also "cause risk management problems at brokerages," he added.

About 1,000 retail investors lost in the collapse of small caps last week, according to media reports.

Kiwoom Securities denied Wednesday recent claims made by Ra Deok-yeon, head of an advisory firm and a suspect in the stock manipulation case.

Ra said in a recent interview that Kim may have short sold the stocks.

Kim said the sale of Daou Data shares was processed in a block deal that commenced in April, and the process was expected to take around two to three weeks.

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