Unfamiliar Oil Prices... Indirect Investment Market in 'Mental Breakdown'

May Indian WTI -37.63 Plunge
ETF, ETN in Principal Loss Zone
Kiwoom, HTS Error Halts Trading

[Asia Economy Reporter Oh Ju-yeon] As international crude oil prices plummeted into negative territory for the first time in history, investors in crude oil exchange-traded funds (ETFs), exchange-traded notes (ETNs), and derivative-linked securities (DLS) fell into panic. This is because the principal invested with the expectation of a rebound was entirely in the loss zone. Some securities firms' home trading systems (HTS) failed to properly recognize the negative prices, causing trading to be suspended, leaving investors in a state of complete "mental breakdown (mental collapse)."

[Image source=Yonhap News]

According to the Korea Exchange on the 21st, individual investors poured 1.2081 trillion won into KODEX WTI Crude Oil Futures (H) from April 2 to May 20. This amount is 32.0% more than Hyundai Motor (915 billion won), the fourth-largest net purchase stock. When combined with 10 other crude oil ETFs and ETNs listed on the exchange, the total is expected to be even higher. The daily net purchase volume has increased about 1,000 times compared to last year. During the same period last year, individuals approached KODEX WTI Crude Oil Futures (H) with very small amounts, with daily net purchases under 100 million won, but this year, daily net purchases have reached 100 billion won. On May 16, when the net purchase volume was the largest this month, individuals bought 228.6 billion won worth of this product in a single day.

However, on the 20th (local time), the May delivery West Texas Intermediate (WTI) crude oil on the New York Mercantile Exchange (NYMEX) plunged to -$37.63 per barrel, making the previously unthinkable "negative oil price" a reality, causing those who invested expecting a rebound to suffer losses. Selling was strong on only 3 out of 35 trading days, indicating strong buying.

As of April 2, the average purchase price for individuals was 15,652 won. From then until the 17th, they increased their holdings in the 10,000 won range by a total of 95.2 billion won. Although this accounts for only 7.9% of the total purchase proportion, the losses they incurred exceed -60%. The amount purchased in the 8,000 to 9,000 won range was about 590 billion won, accounting for 48.8% of the investment amount, and they are estimated to have suffered an average loss of -30%.

From May 16, when the average daily net purchase was the largest (228.6 billion won), until the 20th, individuals bought even more aggressively, purchasing 522.2 billion won worth. At that time, the stock price dropped to 7,115 won, 7,055 won, and 6,340 won, which is interpreted as a buying spree aimed at lowering the average price and bargain hunting. However, this period is also estimated to have incurred losses in the double digits percentage range.

The problem is that the crude oil price crash does not end with just principal losses. An unprecedented situation occurred where the HTS failed to recognize the negative oil prices, causing trading to be forcibly halted. As a result, it is reported that investors' liquidation orders were not processed.

On that day, Kiwoom Securities' HTS failed to recognize the negative oil prices, causing trading to stop. Investors holding long positions in crude oil futures using Kiwoom Securities' HTS were forced into margin calls and forced liquidation. Some investors reportedly not only lost their principal but also incurred debt. On an online securities bulletin board, one investor lamented, "Because the HTS did not recognize the negative prices, trading stopped, and those holding oil were forcibly taken to zero value and received margin calls," adding, "Even now, many cannot liquidate, and as the oil price falls, their debt piles up." He further added, "With May contracts at -$37, even those who bought at $20 and waited are now in a situation where the debt they owe exceeds their losses."

Not only Kiwoom Securities but other securities firms also failed to recognize the negative prices. An industry insider said, "This is an extremely unusual situation, and most securities firms commonly experienced the failure to recognize negative oil prices."

However, securities firms that did not originally offer crude oil futures trading were able to avoid the negative oil price shock. There were rumors that Samsung Securities forcibly liquidated investors who purchased before 3 p.m. the previous day to prevent damage, but this is not true. A Samsung Securities representative explained, "Crude oil futures trading and ETNs tracking crude oil futures indices are separate. Samsung Securities does not offer crude oil futures trading, so this issue did not occur here."

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