South Korea's financial regulator is preparing a channel for investors holding fewer than 20 shares of single-stock leveraged exchange-traded funds to sell their holdings before a planned increase in the minimum trading unit. Regulators are weighing whether to allow after-hours closing-price trading for a limited period so investors can clear leftover shares that could no longer be sold during regular trading hours.
The Financial Services Commission plans to release detailed rules next month on expanding the trading unit for single-stock leveraged ETFs, including how odd lots will be handled, according to financial investment industry sources on the 6th.
In July, the FSC tightened investment requirements for single-stock leveraged ETFs and said it would raise the minimum trading unit to 20 shares. The measure is intended to curb overheating driven by small-sum, short-term trading, but the handling of existing investors' odd lots remained unresolved. Once the rule takes effect, holders of one to 19 shares will be unable to sell during regular trading hours, and even investors holding 20 shares or more will find it difficult to dispose of remaining shares after trading in blocks of 20.
The solution under review is to permit trading on a temporary basis through after-hours closing-price transactions. Under the plan, odd lots would be granted an exception, allowing investors to sell at the day's closing price between 3:40 p.m. and 4 p.m. after the regular session ends.
After-hours closing-price trading has a drawback, however, in that the price is fixed at the day's close, leaving investors unable to choose their selling price. For that reason, officials are also considering a grace period of several months before the rule takes effect, to give adequate notice of the change and allow investors time to respond.
Once the temporary trading window closes, investors are expected to handle remaining shares individually by asking their brokerage to buy the odd lots. The effective date and the length of the after-hours trading window are expected to be specified in next month's detailed rules.
Behind the increase in the trading unit is the regulator's assessment that a low barrier to entry encouraged short-term trading. Single-stock leveraged products trade at levels close to their typical issue price of 10,000 to 20,000 won, allowing investors to gain exposure with less money than buying shares of the underlying assets, Samsung Electronics (005930.KS) and SK hynix (000660.KS), directly. Raising the trading unit to 20 shares is meant to reduce an excessive influx of small trades.
Trading enthusiasm for the products has indeed cooled since the July measures were announced. The combined market capitalization of 16 single-stock leveraged products swelled to 16.5 trillion won from 4.4 trillion won on their listing date of May 27, before falling to a recent range of 6 trillion to 7 trillion won. Trading value, which had surged to 19.4 trillion won at the end of June, has recently declined to between 500 billion and 800 billion won.
Market volatility has also eased. The KOSPI 200 Volatility Index, known as Korea's fear gauge, fell to 41.0 on the 2nd of this month from 96.9 on June 29. Circuit breakers and sidecars, triggered nine times and 49 times respectively on the main bourse this year, have not been activated since July 29 and Aug. 20.
The concentration in Samsung Electronics and SK hynix has also moderated somewhat. With the KOSPI recovering the 7,000 level on the 2nd of this month and buying interest spreading to small- and mid-cap stocks, the two stocks' combined share of market capitalization fell 6.3 percentage points to 50.8% at the end of last month from 57.1% at the end of June.
