Market Maker System Fueled by Short Selling Distrust... Financial Supervisory Service Embarrassed

[Asia Economy Reporter Ji Yeon-jin] The Financial Supervisory Service's imposition of fines totaling approximately 48 billion KRW on nine market makers for alleged price manipulation has ultimately been canceled. The Securities and Futures Commission concluded that the repeated cancellation of quotes by these market makers does not constitute price manipulation. During the COVID-19 market crash, short selling was banned, but market makers continued short selling, which increased distrust among individual investors. Although the Financial Supervisory Service launched an investigation, it faced criticism for imposing excessive fines that increased the trading burden on investors.

According to financial authorities on the 21st, the Financial Supervisory Service imposed fines of 48.7 billion KRW on nine securities firms acting as market makers on September 1 last year, citing violations of Article 187-2 of the Capital Markets Act. This article prohibits "repeatedly correcting or canceling submitted quotes in a way that unfairly influences or may influence prices." Market makers submit two-way quotes according to predetermined rules to facilitate stock market trading.

For example, if the current quote for stock A, which was last traded at 100 KRW, is 150 KRW, the market maker submits a quote at 110 KRW to enable a trade. From an investor's perspective, this allows purchasing stocks at a lower price than 150 KRW, reducing trading costs. However, securities firms argue that if one side of the two-way quotes results in a trade and the stock price drops, the market maker incurs a loss, making cancellations inevitable.

The Financial Supervisory Service reportedly imposed fines collectively on stocks with high cancellation rates after quotes were submitted by these market makers. The Securities and Futures Commission accepted the securities firms' argument that the correction and cancellation rates of the nine market makers (95.68% to 99.55%) were not higher than the New York Stock Exchange's average daily correction and cancellation rate of 94.6%, and that market makers could incur losses if they did not cancel. A Financial Services Commission official stated, "While some market makers profited from certain stocks, many cases could not be proven." Market makers have suspended operations for ten months since last September. A Korea Exchange official said, "It is estimated that market trading costs have significantly increased."

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