Liquidity providers breached quote duties 31 times on single-stock ETFs, data show
In short
Korea Exchange data obtained by a lawmaker show 31 cases in which liquidity providers for single-stock leveraged and inverse ETFs failed to meet quote submission obligations between 27 May and 12 August. The longest lapse ran 121.77 minutes, on 3 August, when Samsung Electronics fell 8.76% and SK Hynix 8.79%. Separate second-quarter LP evaluations showed average scores falling 4.16 points to 68.93, with 21 of 26 securities firms declining.
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Liquidity providers for South Korea's single-stock leveraged and inverse ETFs failed to meet their quote submission obligations in 31 cases between 27 May and 12 August, according to Korea Exchange data submitted to Rep. Kim Hyung-yeon of the Cho Kuk Innovation Party, as reported by Yonhap. Yonhap said the average intraday duration of the violations was 17.32 minutes. Newsis reported the same total of 31 cases and said the longest lasted about two hours. [ 1 , 2 ]
Under the ETF market's rules, securities firms acting as liquidity providers must post buy and sell quotes to help form fair prices. A violation occurs when the gap between those quotes widens beyond a pre-reported standard for a sustained period and the LP does not submit the required quotes. Yonhap said wider spreads can increase the risk that an investor trading immediately is filled at an unfavourable price. [ 1 ]
Six cases had a quote submission compliance rate below 95 percent, five of them concentrated between 3 and 5 August, Yonhap reported. On 3 August, Samsung Electronics fell 8.76 percent and SK Hynix fell 8.79 percent. The lowest compliance rate was 67.53 percent that day at Hanwha Asset Management's PLUS Samsung Electronics Single Stock Leverage, with a violation time of 121.77 minutes; the same product recorded 74.47 percent and 95.75 minutes the next day. Hana Asset Management's 1Q SK Hynix Futures Single Stock Leverage recorded 86.24 percent on 3 August and 91.48 percent on 4 August. [ 1 ]
Separately submitted LP evaluations for the first and second quarters showed broad deterioration, Yonhap reported. The average total score across 26 securities firms fell 4.16 points, from 73.09 to 68.93, and 21 firms recorded lower totals. The 40-point obligation-fulfilment item fell 3.33 points, from 37.31 to 33.98, accounting for about 80 percent of the overall average decline. All firms except Bookook Securities saw that item fall. B grades dropped from 18 firms to 6 and C grades rose from 7 to 19; no firm received an F grade, but Hana Securities scored exactly 60, at the C threshold. Yonhap noted the evaluation covers second-quarter results and predates the August violations. [ 1 ]
The lawmaker's office also raised questions about asset managers' oversight. According to the office, the asset managers replied that they manage the deviation rate between an ETF's market price and net asset value but find it difficult to determine whether an LP failed to submit quotes and do not directly manage that. The lawmaker's office said managing the deviation rate alone is not enough to assess actual trading conditions such as the gap between buy and sell quotes. [ 1 ]
Kim said it is uncertain whether the current system, under which an LP avoids sanctions as long as it avoids an F grade in its evaluation, effectively secures accountability, adding that “a structure without a safety net at the most vulnerable moment must be improved”. [ 1 ]
Why it matters
Liquidity providers are the mechanism meant to keep buy and sell prices close in single-stock leveraged ETFs, products aimed at retail investors; the data indicate that duty weakened on the most volatile days, when it matters most. A lawmaker has used the figures to argue the current sanction structure, which avoids penalties as long as an LP avoids an F grade, may not secure accountability. The documents do not say what sanctions, if any, followed the breaches.
Key facts
- Korea Exchange data submitted to Rep. Kim Hyung-yeon of the Cho Kuk Innovation Party showed 31 reported-spread violations across 16 single-stock leverage and inverse ETFs from 27 May to 12 August. [ 1 ]
- The average intraday duration of the 31 violations was 17.32 minutes. [ 1 ]
- Six cases had a quote submission compliance rate below 95 percent, five of them between 3 and 5 August. [ 1 ]
- The longest lapse was 121.77 minutes on 3 August in Hanwha Asset Management's PLUS Samsung Electronics Single Stock Leverage, which had a 67.53 percent compliance rate that day and 74.47 percent the next day. [ 1 ]
- In LP evaluations, the average total score across 26 securities firms fell from 73.09 in the first quarter to 68.93 in the second quarter, and the 40-point obligation-fulfilment item fell from 37.31 to 33.98. [ 1 ]
- The number of securities firms rated B fell from 18 to 6 between the two quarters, while C-rated firms rose from 7 to 19; no firm received an F grade, and Hana Securities scored 60. [ 1 ]
- Newsis reported the same 31 cases and violations lasting up to two hours. [ 2 ]
Confirmed by several sources
- Single-stock leverage ETF liquidity providers breached quote submission duties in 31 cases, with the longest lapse lasting about two hours. [ 1 , 2 ]
- The data came from the Korea Exchange and was submitted to a lawmaker, and the breaches occurred between 27 May and 12 August. [ 1 ]
- Second-quarter LP evaluations showed lower average scores than the first quarter, and no security firm received the lowest F grade. [ 1 ]
Still unclear
- Whether the second-quarter LP evaluation that showed lower scores includes the August quote violations. Yonhap reported that the evaluation covers second-quarter results and was produced before the August violation cases were reflected.
- What penalties, if any, followed the 31 quote obligation breaches. The documents describe the violations and the evaluation system but do not state any sanction imposed on a liquidity provider.
- The full list of ETFs and securities firms involved in the 31 cases. The data covers 16 ETFs, but the article names only two products as examples.
- Whether asset managers bear responsibility for their LPs' quote submissions. The lawmaker's office said the asset managers replied that they manage the deviation rate but find it difficult to identify or directly manage LP quote non-submission.