[Song Seungseop's Financial Light] How Did the '1000% Soaring Stock' Crash?

Last Month's SG Securities-Induced Stock Price Crash
Will Collusive Trading and Contract for Difference (CFD)
Stock Price Manipulation Suspicions Be Proven True?

Editor's NoteFinance is difficult. It is filled with confusing terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and to consistently follow the flow of money, a foundation of financial knowledge is essential. Therefore, Asia Economy selects one financial issue each week and explains it in very simple terms. Even those who know nothing about finance can immediately understand these 'light' stories that turn on the bright 'light' of finance.

CEO Ra Deok-yeon of H Investment Consulting Firm
Photo by Yonhap News

In recent years, some stocks that had been on an upward trend in the stock market suddenly plummeted last month. Suspicious of this, financial authorities and prosecutors launched an investigation. The suspicion is that this incident was caused by stock price manipulation. We unravel the tangled case involving somewhat unfamiliar terms such as wash trading and Contract For Difference (CFD).

The incident dates back 2 to 3 years. Certain stocks on the KOSPI and KOSDAQ attracted attention and steadily rose. Some even increased by more than 1000%. The industries varied, including gas companies, software firms, port logistics companies, and financial holding companies. Due to the unusually high rise, both analysts and general investors speculated that 'there is a powerful force behind it' or 'it could crash anytime.'

On April 24, 2023, these stocks suddenly began to plummet as soon as the market opened. Within tens of minutes, they hit the lower limit price and continued to fall for 3 to 4 consecutive days. The market capitalization that evaporated is estimated to be about 7.3 trillion won. For stock prices to fall this drastically, there must be a clear reason?such as the company going bankrupt or facing an insurmountable risk. However, these stocks did not have such circumstances.

CFD Amplified the Stock Price Decline

The apparent cause is the Contract For Difference (CFD) system. CFD literally refers to a transaction related to the 'difference.' Suppose you want to invest in stock A priced at 1 million won. Since 1 million won is a large amount, you hesitate to invest. But securities firm B offers, 'If you pay only 400,000 won, you can get the same effect as investing.' This is the essence of CFD.

The way to make a profit is as follows. If stock A rises to 1.1 million won, you gain the difference of 100,000 won from the original stock price. Although you do not actually own stock A, it is a financial product that lets you earn the increase when the stock price rises. But what if the stock price falls to 900,000 won? Securities firm B takes 100,000 won from the 400,000 won you paid. If the stock price drops to 600,000 won, you naturally lose all 400,000 won and must pay an additional 200,000 won.

The large stock price drop on the 24th of last month is also related to CFDs. When stock prices fall, securities firms naturally initiate forced liquidation. The foreign securities firm Soci?t? G?n?rale (SG Securities) was no exception. The controversial stocks had CFD contracts through SG Securities. As the stock prices fell, SG Securities began selling according to procedure. The flood of sell orders pushed prices down further, creating a vicious cycle of falling prices and increased selling.

Emerging Suspicion of Wash Trading and Stock Price Manipulation

So far, there is no problem. Stock price crashes are rare but can occur in a market economy and, although harmful to the economy, cannot be definitively labeled as a crime. The problem lies in the suspicious process by which these stocks rose so high.

It is the suspicion of wash trading. Wash trading is the act of prearranging the time and price to buy and sell specific stocks. This technique exploits the fact that high trading volume is perceived as a good stock in the market, causing the stock price to rise. It is strictly prohibited under the Capital Markets Act because it disrupts the market. Violators face up to 10 years in prison or fines amounting to 1 to 3 times the profits gained.

The reason for suspicion of wash trading in the market is that there is evidence that certain individuals gathered investors for these stocks. Investors who suffered losses in this incident testified that they entrusted their mobile phones and securities accounts in their names to La Deok-yeon, the head of an investment advisory firm. Among the investors were also famous singers Lim Chang-jung and Park Hye-kyung. Investors claim that La’s side secretly accepted margin trading, which led them into heavy debt.

On the other hand, La denies any wash trading. In a recent phone interview with Asia Economy, La explained that stocks are basically bought, and if there are investors who want to sell, only some sales are made.

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