Exclusive: Regulators Probe Foreign High-Frequency Trading Over Volatility in Single-Stock Leveraged ETFs

Financial authorities scrutinize trading records

South Korea’s financial authorities have launched a probe into foreign investors’ high-frequency trading, or HFT, in domestic single-stock leveraged exchange-traded funds. Regulators suspect the large-volume trading abnormally amplified volatility in the products.

According to the financial investment industry on July 30, authorities have obtained trading records from Korea Investment & Securities Co. and Yuanta Securities Korea Co., which provided direct market access, or DMA, services to foreign ultra-short-term traders. They are analyzing order patterns and the trades’ market impact. HFT uses ultra-fast computers and algorithms to repeatedly place and cancel large volumes of orders in microseconds to capture tiny price discrepancies.

DMA is essential for such trading because it sends orders directly to an exchange without passing through a brokerage’s order system. These traders had mainly routed orders through global brokerages including JPMorgan, Morgan Stanley and Goldman Sachs. More recently, Korea Investment & Securities and Yuanta Securities Korea have aggressively expanded their DMA businesses, leading to a sharp increase in foreign HFT activity, according to industry participants.

The authorities are focusing on whether foreign HFT heightened volatility in the underlying stocks of single-stock leveraged ETFs during trading in the cash, ETF and futures markets. They are also examining whether arbitrage by HFT firms amplified price swings and affected supply-demand conditions as liquidity providers, or LPs, hedged using the underlying shares.

“We are closely examining how HFT entered the domestic market and how such trading is being conducted,” a financial authority official said.

Jeon Ye-jin and Shim Woo-il, Hankyung reporters ace@hankyung.com