Recent instances of price distortion in leveraged ETFs and ETNs have prompted warnings for investors. Both the exchange and financial authorities are aware of the situation and are conducting reviews, but they maintain that investors must remain vigilant regarding the products' structures and trading methods.
According to the financial investment industry on June 25, Kiwoom Securities' 'Kiwoom Leveraged Semiconductor TOP10 ETN' saw a dramatic 55.69% surge in price on June 23, moving in the opposite direction of its underlying index.
During this time, the domestic stock market was experiencing a significant decline. Samsung Electronics dropped 12.31%, and SK Hynix fell 12.47%, reflecting a general downturn in semiconductor-related stocks. Typically, the ETN, which is designed to double the performance of the semiconductor sector, would also decline, but it surged during the closing auction, resulting in a discrepancy exceeding 100%.
Kiwoom Securities later explained in a public announcement that the price surged due to orders being executed at extremely low liquidity levels during the closing auction, causing the market price to significantly exceed the real-time indicative value. In fact, the ETN dropped nearly 50% in the early trading of the following day as prices normalized.
A similar phenomenon occurred with the 'Kiwoom KOSDAQ 150 TR ETN' on the same day. This product also saw its price formed at 24.81% above its indicative value during the closing auction, and the following day, the discrepancy was corrected, leading to a drop of over 19% in early trading.
Similar cases were reported earlier this month. The 'ACE SK Hynix Single Stock Leveraged ETF' from Korea Investment Trust Management experienced a nearly 50% price surge just before the market closed on a day when SK Hynix's stock price fell by more than 7%. A volatility control mechanism was triggered, extending the trading period, but some liquidity providers withdrew their bids at the usual closing time, creating a liquidity gap.
Market analysts suggest that the recent increase in trading of single-stock leveraged ETFs and thematic ETNs, amid heightened market volatility, has led to the recurrence of such incidents. Due to the structure of leveraged products, which aim to double the daily returns of their underlying assets, price distortions can be particularly pronounced in low liquidity situations.
The Korea Exchange is aware of these phenomena. A representative stated, "We are internally discussing the need for regulatory improvements," but added that no specific measures have been finalized yet.
The Financial Supervisory Service is also reviewing related cases but maintains that these issues arise within the framework of liquidity provider operations and exchange regulations. Current exchange rules allow for exemptions from liquidity provision obligations during certain periods, making it difficult to determine if any regulations have been violated.
In fact, the Financial Supervisory Service had previously warned in late 2023 about the potential for increased price volatility during specific time frames for investment products like ETFs and ETNs. They indicated that liquidity providers might not submit liquidity supply bids during the single-price trading periods for opening and closing prices, and that for stocks with insufficient trading volume, market prices could be formed abnormally.
* This article has been translated by AI.
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