Recent instances of price distortions in leveraged ETFs and ETNs have prompted warnings for investors. Both the exchange and financial authorities are aware of these occurrences and are conducting reviews, but they maintain that, under current regulations, investors must remain vigilant about the product structures and trading methods.
According to the financial investment industry on June 25, Kiwoom Securities' 'Kiwoom Leveraged Semiconductor TOP10 ETN' saw a dramatic 55.69% surge in price on June 23, moving in the opposite direction of its underlying index.
At the same time, the domestic stock market was experiencing a sharp decline. Samsung Electronics dropped 12.31%, and SK Hynix fell 12.47%, reflecting a general downturn in semiconductor-related stocks. Given that this ETN is designed to double the performance of the semiconductor sector, a decline would typically be expected; however, during the closing auction, the price surged, resulting in a discrepancy exceeding 100%.
Kiwoom Securities later explained in a public notice that orders were executed at extremely low liquidity prices during the closing auction, causing the market price to significantly exceed the real-time indicative value. In fact, the ETN experienced a nearly 50% drop at the start of trading on the following day as the price normalized.
A similar phenomenon occurred with the 'Kiwoom KOSDAQ 150 TR ETN' on the same day. This product was also priced 24.81% higher than its indicative value during the closing auction, and it fell more than 19% at the start of trading the next day as the discrepancy was resolved.
Similar cases were reported earlier this month. The 'ACE SK Hynix Single Stock Leveraged ETF' from Korea Investment Trust Management saw its price surge nearly 50% just before the market closed on a day when SK Hynix's stock price had dropped over 7%. During that time, a volatility control mechanism was triggered, extending the trading period, but some liquidity providers withdrew their bids at the usual market closing time, leading to a liquidity gap.
Market analysts suggest that as stock market volatility has increased, trading in single-stock leveraged ETFs and thematic ETNs has risen, leading to repeated instances of price distortions. The structure of leveraged products, which aims to double the daily returns of the underlying asset, can exacerbate price distortions, particularly in low liquidity situations.
The Korea Exchange is aware of these phenomena. A representative stated, "We are internally discussing the need for regulatory improvements," but added that no specific plans have been finalized yet.
The Financial Supervisory Service is also reviewing related cases but maintains that these issues arise within the scope of liquidity provider operations and exchange regulations. Current exchange rules allow for exemptions from liquidity provision obligations during certain periods, such as during the opening and closing auctions, making it difficult to determine regulatory violations.
In fact, the Financial Supervisory Service had previously warned in late 2023 about potential price volatility during specific timeframes for investment products like ETFs and ETNs. They indicated that during the single-price trading periods for opening and closing prices, liquidity providers might not submit liquidity bids, leading to abnormal market prices for stocks with insufficient trading volume.
* This article has been translated by AI.
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