[Inside Chodong] Aftermath of 'CFD Stock Manipulation' Fueled by Financial Authorities and Regulators

Amid the wave of limit-down price crashes triggered by the foreign securities firm Societe Generale (SG) Securities, criticism is mounting against the financial authorities (Financial Services Commission) and supervisory bodies (Financial Supervisory Service) as it has been revealed that stock manipulation groups exploited Contract for Difference (CFD) trading. They took advantage of loopholes in CFD trading, and the authorities' neglect of regulatory improvements ultimately led to this incident.

Among the eight stocks hitting the limit-down, more than four continued to rise without any special positive factors, sparking rumors in the securities industry since last year that manipulation groups were involved. Some securities firm analysts even warned of abnormal signs, saying "the stock prices seem excessive." However, the authorities responsible for supervision and related institutions (Korea Exchange) failed to detect any signs until media investigations and reports brought the issue to light.

The authorities’ lament that it was difficult to detect signs without insider tips due to the intelligent method of gradually raising stock prices over a long period is understandable. However, they cannot evade responsibility when it comes to the abuse of CFDs. This is not the first time. In 2020, the Korea Exchange detected a case where an individual investor, Mr. A, used a CFD account to place large-scale manipulative buy orders to prevent the price drop of stocks he owned.

CFDs are over-the-counter derivatives that allow professional investors who meet certain requirements to invest (leverage) up to 2.5 times (margin rate 40?100%) the amount of cash they hold as margin. Since CFDs are traded through foreign OTC brokerage firms (CIMB) and prime brokers (such as CS Securities) without directly owning the stocks, they are not subject to '5% shareholding disclosure' or 'short-selling reporting' requirements. Also, even if individuals trade, the supply and demand data appear as 'foreign investors.' In fact, CFDs fall into a blind spot of statistics and supervision. Because they can produce a large price manipulation effect with a small amount of capital, they are frequently used as an unfair trading method.

In 2019, Lee Hak-young, a Democratic Party lawmaker (member of the Political Affairs Committee), raised his voice, saying, "CFD trading is increasing, but it is a blind spot in statistics and supervision, and there is a possibility of evading obligations such as large stockholding or short-selling reporting, so regulatory improvement is urgent." CFDs were also identified as a major cause of the KOSDAQ crash in August of that year. The Financial Supervisory Service also recognized the problem and stated the need to improve related laws in consultation with the Financial Services Commission.

If regulatory improvements had been initiated early at that time, this incident might not have occurred so easily. At least, it might have prevented damages such as individual investors mistakenly judging stocks as 'value stocks' and jumping on the investment bandwagon.

There is a growing call for transparency so that ordinary investors can easily check the scale of CFD trading, outstanding balances, and forced liquidation ratios, just as they can easily check short-selling or credit loan ratios when investing in specific stocks. Some argue that cautious approaches are needed because the CFD market could shrink.

However, regulatory improvements focused on enhancing transparency to protect investors are absolutely necessary. The Korea Capital Market Institute pointed out that the greater the market volatility, the more forced liquidations occur in CFD accounts, causing significant damage to investors, but insufficient information provision induces fear, further worsening volatility.

The 'cow' is already lost. The 'barn (CFD regulatory system)' must be fixed quickly. On the 2nd, Kim So-young, Vice Chairman of the Financial Services Commission, announced that they will start improving the CFD system together with the Financial Supervisory Service and the Korea Exchange. It is hoped that the improvements will be swift and thorough.

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