Foreign investors accounted for about 40% of trading in single-stock leveraged exchange-traded funds (ETFs). Financial authorities left open the possibility of additional regulations on institutional and foreign investors, depending on future trends.
According to written responses submitted by the Financial Supervisory Service (FSS) to the National Assembly’s National Policy Committee on the 6th, total trading value of single-stock leveraged ETFs reached 497.9 trillion won from May 27 to July 28. Of this, foreign trading value stood at 202.4 trillion won, or 40.6% of the total.
Earlier, on the 16th of last month, financial authorities announced investor protection measures centered on raising the basic deposit requirement for single-stock leveraged ETFs and strengthening investor education. However, the measures targeted only individual investors, excluding institutional and foreign professional investors.
Some investors and experts pointed out that it is difficult to reduce volatility without regulating institutional and foreign investors. In particular, critics said foreign investors are increasing market volatility by repeatedly conducting ultra-short-term trades using high-frequency trading (HFT) and algorithmic trading (automated trading using computer programs).
“Since individuals make up the majority of investors, we took measures for individuals,” the FSS said. “We will monitor future trends and respond if measures for institutional and foreign investors become necessary.”
It added, “We plan to prepare measures to increase trading costs by referring to existing systems.” The existing system mentioned by the FSS is interpreted as referring to the “excessive quote surcharge” introduced in the derivatives market. This system imposes a surcharge of 1 million won per transaction on accounts and algorithms with low execution rates but excessive quotes, in order to curb excessive quoting.
Through this, financial authorities intend to curb excessive trading such as high-frequency trading and ease volatility in the single-stock leveraged ETF market.
Meanwhile, over the same period, the preliminary management fees for the 16 single-stock leveraged ETFs totaled 3.665 billion won. Management fees are commissions that asset management firms receive in return for operating and managing ETFs. They are automatically deducted from investors’ holdings.