[Beginner's Guide to Stock Market] Stock Price Manipulation Through Debt... What Is 'CFD' That Made Retail Investors Cry?

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Korean Version of the Bill Hwang Incident

The Real-Life Version of the Movie ‘Operation’

These are the nicknames attached to the recent stock price crash triggered by SG (Societe Generale) Securities that shook our stock market.

Without any particular issue, eight stocks simultaneously hit the lower price limit, causing more than 7 trillion KRW in market capitalization to evaporate.

Let’s find out what really happened behind the scenes.

Eight Stocks Hit Lower Price Limit Simultaneously... The Story Behind Over 7 Trillion KRW Market Cap Loss

On the 24th.

Seonkwang, Harim Holdings, Daesung Holdings, Sebang, Dow Data, Samchully, Seoul Gas, Daol Investment Securities.

The stock prices of these eight listed companies fell to the price limit and closed the market.

The problematic eight stocks started to decline right after the market opened and all hit the lower price limit within just 30 minutes.

These eight stocks, which seemed unrelated, shared one common factor.

All had massive sell orders pouring out from the foreign securities firm SG Securities’ trading desk.

On the 24th alone, SG Securities sold 1,912,287 shares of Harim Holdings, 616,762 shares of Daol Investment Securities, 338,115 shares of Dow Data, 121,925 shares of Sebang, 13,691 shares of Samchully, 11,909 shares of Daesung Holdings, 7,639 shares of Seoul Gas, and 4,298 shares of Seonkwang.

Among these eight stocks, Seoul Gas and Daesung Holdings recorded the lower price limit for four consecutive trading days starting from the 24th, marking the first such case in the KOSPI market since the price limit was expanded to 30% in June 2015.

What is CFD, the Main Suspect?

How was this possible?

It was due to CFD (Contract For Difference), a derivative product called ‘difference settlement transaction’.

This concept might be unfamiliar to many Joorini investors.

CFD trading is only available to professional investors who meet at least one of three criteria: an average monthly balance of 50 million KRW or more over a year, ▲individual annual income of 100 million KRW or more or combined spousal income of 150 million KRW or more ▲holding financial or special qualifications ▲net assets of 500 million KRW or more excluding liabilities.

So, what kind of product is CFD?

CFD is a derivative product that settles only the price difference without holding the underlying asset.

Simply put, if you pay a margin, the securities firm trades stocks on your behalf, giving the profit to the investor and taking a commission.

Professional investors can trade without actually owning the stocks, and with only 40% margin, they can leverage up to 2.5 times.

In other words, you only need 400,000 KRW to buy stocks worth 1 million KRW.

Although risky, it is known to be mainly used by high-net-worth individuals because the investor’s identity is not exposed.

However, since it is a borrowed transaction, repayment or extension of maturity must be made when due.

If this is not fulfilled, forced liquidation occurs.

In other words, the recent SG Securities-triggered stock price crash is presumed to have occurred because a specific group conducted massive stock trading through CFDs and failed to repay, resulting in massive sell-offs.

Aftershock from SG

The SG Securities-triggered stock price crash caused a huge shock to our stock market, and the aftershocks are also significant.

It is known that celebrities such as singer Lim Chang-jung, professionals like doctors, and famous company chairmen are involved, sparking outrage among individual investors.

Due to the nature of the derivative product CFD, when trading through CFD accounts, the investor is recorded as a foreign securities firm, creating a supply-demand illusion as if foreigners are buying the stocks.

From the perspective of individual investors, they think the stocks are ‘blue-chip’ because foreigners are buying them and sometimes purchase accordingly.

This SG Securities-triggered stock price crash targeted stocks with almost no trading volume or a small number of circulating shares.

In fact, among the eight stocks involved in this price manipulation, Seoul Gas has only 17.4% of its shares circulating.

Seonkwang also has only 38.3% circulating in the market.

This is because ‘manipulation’ is easier that way.

These groups gradually raised stock prices using ‘matched orders’.

Matched orders are illegal trading activities where buyers and sellers prearrange prices and times to buy and sell stocks to each other.

For example, if Mr. A and Mr. B collude to buy and sell 10,000 shares to each other, the trading volume increases significantly, causing the stock price to rise.

When trading volume increases and stock prices rise, not only the manipulation group but also individual investors become interested and start trading.

Then, once general investors join, the manipulators realize profits by controlling the market price.

In the end, some groups profited while only individual investors suffered losses.

As the aftershocks are enormous, financial authorities are taking a tough stance, vowing to severely punish those involved.

The prosecution and financial authorities have formed a joint investigation team and entered a full-scale investigation phase.

The Financial Services Commission raided the office of H Investment Consulting, identified as a stock manipulation group, related companies, and residences.

They also imposed travel bans on about 10 suspected individuals involved in stock manipulation.

Despite this, as innocent individual investors suffered significant damage, the financial authorities have faced criticism for their delayed response.

It is reported that the Financial Services Commission received reports of the stock manipulation suspicions from early April but failed to take swift action, leading to a larger scale of damage.

Dear Joorini investors,

Sometimes reality is more dramatic than movies.

This SG Securities-triggered stock price crash seems to be one of those cases.

It is especially regrettable that individual investors bore the brunt of the damage.

We need to watch how the financial authorities respond,

and whether this incident will serve as a model for eradicating unfair practices in the capital market.

We hope such incidents never happen again, and with that, I conclude this article.

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This article is from [Joorini Guide], published weekly by Asia Economy. We explain stock-related financial news and difficult economic stories in an easy and friendly way so that stock beginners can understand. By subscribing, you can receive articles for free.

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