Following the announcement of supplementary measures for single-stock leverage on July 16, the financial authorities are facing criticism from the securities industry regarding the increased responsibility for managing exchange-traded funds (ETFs).
According to the financial investment industry on July 21, the core of the improvement plan is the heightened obligation to manage discrepancy rates. In the ETF market, liquidity providers (LPs) from securities firms are responsible for reducing the gap between market prices and net asset values by providing buy and sell quotes. The new measures will tighten the LPs' obligation to manage end-of-day discrepancy rates from the previous 3% to 2%.
Industry experts argue that this change may actually lead to more violations of discrepancy rates. The widening of discrepancy rates is influenced by various factors, including liquidity of underlying assets, trading volume, market volatility, order imbalances, and hedging conditions. Therefore, they contend that applying a uniform 2% standard across all products has its limitations.
The rebalancing structure of leveraged ETFs also complicates discrepancy rate management. Single-stock leveraged ETFs, along with all leveraged ETFs, require rebalancing to align exposure to underlying assets with target ratios based on end-of-day prices. This is particularly contentious for single-stock leveraged ETFs, where trading demand is concentrated on specific stocks like Samsung Electronics or SK Hynix, leading to greater market volatility.
Conversely, products with low liquidity pose additional challenges. Small-cap and thematic ETFs may experience temporary widening of discrepancy rates even when quotes are submitted normally, especially during market shocks. Unforeseen variables, such as geopolitical risks or surges in commodity prices, can lead to concentrated investment demand in specific themes, increasing the likelihood of price distortions. Additionally, with over 1,150 listed products, there are concerns that the sheer number of items to manage has not been adequately considered.
The simultaneous quoting period is also a key issue. From 3:20 PM to 3:30 PM, just before the regular market closes, simultaneous quoting occurs to determine end-of-day prices. During this time, LPs are exempt from submitting ETF quotes, and the characteristics of large-scale trades from asset managers and individual investors tend to concentrate, leading to increased market volatility. For instance, on June 8, a large buy order during this period caused the discrepancy rate for the 'ACE SK Hynix Single-Stock Leverage' product to soar to 90.18%.
There are structural concerns that the current liquidity provision system is unable to keep pace with the rapid expansion of the ETF market and increasing market volatility. In times of heightened market volatility, existing LP personnel may struggle to adjust prices quickly enough to match market movements, which can lead to wider discrepancy rates.
Industry representatives agree that fundamental institutional improvements should take precedence over merely tightening discrepancy rate standards. They advocate for reforms in trading systems to disperse orders concentrated at the end of the day and structural improvements in the simultaneous quoting operation and single-price trading times to better absorb and supply market liquidity.
Additionally, the method of calculating the indicative net asset value (iNAV) is identified as an area needing enhancement. Discrepancy rates are defined as the difference between net asset values and market prices. Therefore, the current method of calculating net asset values based on end-of-day prices may not accurately reflect the true value of ETFs during periods of high market volatility or when the pricing of underlying assets is not smooth. There is also a suggestion to consider calculating both upper and lower ranges of appropriate values during trading hours.
An industry insider noted, "While strengthening discrepancy rate management may reduce the average discrepancy rate across all ETFs, the actual impact is likely to be minimal. There is also a possibility that this could lead to the departure of LPs feeling burdened by the new requirements."
* This article has been translated by AI.
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