CFD account liquidation triggers another sell-off in two Korean companies

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South Korea’s stock market has been hit by another round of sell-off, similar to the crash 15 days ago that stemmed from SG Securities Korea Co. through contracts for differences (CFDs). It is unclear what exactly triggered the abrupt sell-off, but speculations point to the financial authorities’ full investigation into CFD accounts.

According to Korea Exchange on Friday, shares of DYPNF Co., a company listed on secondary Kosdaq, fell 29.93 percent. Another Kosdaq-listed company Shindaeyang Paper Co. also plunged by as much as 28 percent during the day. The sell-off began at a brokerage as soon as the stock market opened that morning and liquidation of a leveraged product in CFD accounts fueled the crash.

“Some investors started selling the stocks after confirming a sell-off spree at a brokerage as soon as the trading hours began,” said an unnamed official from a securities firm.

One of the top securities firms where most of the sell-off of the two stocks took place is the foreign brokerage house SG Securities, which led the CFD crisis last month. Morgan Stanley & Co. is also at the top of the list in terms of the sell-off of Shindaeyang Paper. CFD accounts at domestic securities companies such as Kyobo Securities Co. and Kiwoom Securities Co. are managed under a contract with SG Securities and Morgan Stanley, which is why CFD accounts are considered to be behind the latest crash as well.

Financial authorities announced its plan on Thursday to investigate all CFD accounts as leveraged investments using CFD accounts were blamed for the incident.

The two stocks also resemble the eight stocks that nosedived last month in that their ratio of outstanding shares is low and margin loan ratio high. The stocks have been steadily rising over the past two to three years.

“No internal factors are at play,” said DYPNF. “Factors such as liquidation seem to have had a big impact on the short-term fluctuation in stock prices.”

Brokerages in the securities industry also cautiously raise possibilities of an involvement of some external forces of market manipulation. “(The possibility of stock price manipulation) cannot be ruled out given that the stocks have shown a gradual upward trend,” said an unnamed official from the securities industry.