Growing Discrepancy Rate, ETN 'Investment Warning'

LP Liquidity Supply Capacity Exists but Discrepancy Widens
ETN Price Fails to Reflect Market Actual Value

[Asia Economy Reporter Minji Lee] As international crude oil price volatility intensifies, the number of investors in Exchange Traded Notes (ETNs) is increasing, but concerns have been raised that the products are not accurately reflecting their actual value due to high price deviation rates. Furthermore, there are cases where the deviation rate remains high despite sufficient liquidity supply capacity, requiring investors to exercise caution.

On the 28th, amid growing concerns over the spread of COVID-19, commuters near Yeouido Station in Seoul hurried along wearing masks on their way to work. Photo by Mun Ho-nam munonam@

According to the securities industry on the 25th, as oil price volatility increases, ETN prices are not properly reflecting their actual value. ETN products are managed by liquidity providers (LPs) who supply liquidity and manage buy and sell quotes. When an investor tries to purchase a specific product, the LP sells the opposite volume to reduce the deviation between the ETN price and the Intraday Indicative Value (IIV) in real time.

However, if buy orders are excessively concentrated and LP-held volumes are depleted, prices are determined solely by investor supply and demand, causing the deviation rate to widen significantly. On the 19th, after oil prices plunged about 20%, buy orders surged, leading to an expansion of the deviation rate for the 'Shinhan Leverage WTI Crude Oil Futures ETN.'

The problem is that some products have high deviation rates requiring investors to trade at a premium despite LP volumes remaining. The IIV of the 'Samsung Leverage WTI Crude Oil Futures' traded the previous day was maintained at around 1,964 KRW, but the average actual product quote was recorded at 2,053 KRW, resulting in an intraday deviation rate of about 5%. LP-held volume was about 47%. In other words, investors paid a premium of 100 KRW to purchase the product. On the same day, the intraday deviation rate of the 'Shinhan WTI Crude Oil ETN,' which still had LP liquidity provision capacity, remained below 2%.

A financial investment industry official explained, "Usually, LPs set the IIV as the midpoint of the quotes to reduce the deviation rate, maintaining a difference of about 1-2%. However, when investors concentrate excessively during certain periods and LP-held volumes run out, the price deviation rate can widen significantly to around 5-15%."

Investors point out that the deviation rate prevents the market situation from being properly reflected. If an investor purchases when the deviation rate has expanded to 7%, even if the ETN price rises by 3% the next day, they will not realize a profit. Additionally, there is criticism that securities firms may be excessively profiting from the deviation rate. A financial investment industry official said, "If distrust in ETN trading spreads due to the deviation rate being handled arbitrarily, it will have a negative impact on the market."

According to Korea Exchange regulations, when investing in overseas indices and products, the deviation rate should be maintained within 6%, and for domestic indices, within 3%. Samsung Securities stated that they are complying with the regulations and that there is no problem. A company official explained, "We are making efforts to narrow the deviation rate as much as possible within the principles," adding, "From the LP's perspective, it is difficult to keep the deviation rate low under the current market conditions." The Korea Exchange said, "We ensure that the deviation rate is maintained within the regulations to prevent situations where price deviation widens due to insufficient remaining volume."

This content was produced with the assistance of AI translation services.