Liquidity providers (LPs) for single stock leveraged exchange-traded funds (ETFs) have repeatedly failed to meet their quoting obligations during significant market declines.
According to data submitted to the National Assembly by Kim Hyung-yeon, a member of the Justice Innovation Party, there were 31 instances of violations of the reported spread for 16 ETFs, including those for Samsung Electronics and SK Hynix, from May 27 to August 12.
The reported spread is the difference between the buy and sell quotes that LPs are required to submit in advance. If the spread widens beyond a certain level and the LP fails to provide the necessary quotes, it constitutes a violation of their obligations.
The average duration of these violations was 17.32 minutes per incident.
Notably, there were six cases where the compliance rate for quote submissions fell below 95%, with five of these occurring between August 3 and 5.
On August 3, Samsung Electronics and SK Hynix saw declines of 8.76% and 8.79%, respectively.
The product with the lowest compliance rate on that day was Hanwha Asset Management's 'PLUS Samsung Electronics Single Stock Leverage,' which had a compliance rate of only 67.53% and a violation duration of 121.77 minutes.
This means the product failed to meet its quoting obligations for nearly two hours. The following day, its compliance rate was still low at 74.47%, with a violation duration of 95.75 minutes.
Hana Asset Management's '1Q SK Hynix Futures Single Stock Leverage' also reported compliance rates of 86.24% and 91.48% on August 3 and 4, respectively.
LPs are responsible for facilitating smooth trading and proper price formation by providing buy and sell quotes. If LPs do not submit quotes effectively, the spread can widen, increasing the likelihood that investors looking to trade will do so at unfavorable prices.
The overall compliance performance of LPs has worsened in the second quarter of this year.
In the comprehensive evaluation conducted quarterly by the exchange, the average score for 26 securities firms dropped from 73.09 in the first quarter to 68.93 in the second quarter, a decline of 4.16 points. Twenty-one firms saw their scores decrease.
Specifically, the average score for the 'compliance' category, which is out of 40 points, fell from 37.31 to 33.98, a drop of 3.33 points. Approximately 80% of the overall decline in average scores occurred in the compliance category.
All but one of the 25 securities firms, excluding Bukook Securities, saw their compliance scores decrease between the first and second quarters.
The evaluation grades also declined. The number of firms receiving a B grade fell from 18 in the first quarter to six in the second quarter, while those receiving a C grade increased from seven to 19.
No firms received an F grade in either quarter, but Hana Securities barely achieved a C grade with a score of 60 in the second quarter.
However, this evaluation reflects performance from the second quarter and does not account for the reported quoting violations in August.
Concerns have been raised about the adequacy of LP management by asset management firms. The deviation rate indicates the difference between the market price of the ETF and its net asset value. However, managing this deviation alone does not sufficiently address the actual trading conditions, such as the gap between buy and sell quotes, according to the lawmaker's office.
Kim Hyung-yeon stated, "The current system allows LPs to avoid penalties as long as they score above an 'F' in evaluations, raising doubts about whether this truly ensures accountability. The lack of safeguards during the most vulnerable moments must be addressed."
* This article has been translated by AI.
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