Samsung, SK Hynix Leveraged ETFs Face Suspected Volume Inflation

Allegations have surfaced that trading volume in newly listed single-stock leveraged exchange-traded funds tied to Samsung Electronics Co. and SK Hynix Inc. was artificially inflated through abuse of the liquidity provider, or LP, system. Smaller brokerages are suspected of using LP accounts to generate repeated trades and boost turnover while absorbing losses.

Industry officials said on May 27 that LPs in the Samsung Electronics and SK Hynix single-stock leveraged ETFs listed that day may have engaged in repeated self-matched trading rather than normal bid-and-ask quoting. The firms may have used program trading to generate continuous executions and inflate volume to attract investors, the officials said.

In some of the single-stock leveraged ETFs, Yuanta Securities Korea Co., LS Securities Co. and SK Securities Co. appeared simultaneously among the top brokerage windows on both the buy and sell sides. Those firms executed tens of millions of shares in a single day. Total trading in the single-stock leveraged ETFs listed that day exceeded 10 trillion won ($7.26 billion). "Orders from smaller brokerages went beyond simply posting quotes as liquidity providers," one industry official said. "They may have kept generating a form of self-trading to inflate volume even at a loss."

At the center of the controversy is whether the LP system was misused. In the ETF market, LPs are responsible for supplying bid and ask quotes to facilitate trading. To support market liquidity, they are subject to somewhat lighter market-surveillance rules than ordinary investors. Industry participants say those features may have been used to increase volume through repeated transactions.

The revenue structure of some smaller brokerages is also being cited as a backdrop. They depend heavily on commission income from leveraged and inverse ETF trading, while a recent surge in domestic stock trading has increased asset managers' influence in the market. Industry officials say earnings at some firms are shaped by their business ties with large asset managers.

Some market participants also claim losses incurred during LP operations were to be offset through orders from other funds or by providing trading volume in other ways. The related costs are estimated at several billion won to tens of billions of won.

Some in the industry say that once the Korea Exchange and financial authorities secure the underlying trading data, they should be able to verify the facts by analyzing trading patterns. Second-by-second execution records, trading value by LP account and evidence of repeated executions would help distinguish normal liquidity provision from trades aimed solely at boosting volume.

Views differ, however, on the legal question. Some say the activity could amount to unfair trading through wash trades or inflated volume. Others argue the line between such conduct and normal LP market-making remains unclear.

"The key issue is whether the trading reflected actual investor demand or artificial transactions using LPs," a financial investment industry official said. "Once the exchange and financial authorities review the execution data, they should be able to determine much of what happened."

Jeon Ye-jin, Hankyung.com reporter ace@hankyung.com