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"Scalpers" may be banned in ELW market

Updated May  27, 2011

By Kim Da-ye

Speculative traders who buy and sell securities in minutes or seconds could disappear next year from the world’s second largest equity linked warrant (ELW) market.

The Financial Services Commission (FSC), Korea’s top financial regulator, is mulling over punishing those day traders known as scalpers when their intra-day technique involves orders made without any intention to buy or sell securities but with the purpose of influencing stock prices.

The FSC is reviewing the range of scalping practices that would be considered unlawful, and will make its final decision next month on amendments to the Capital Market Law.

It intends to establish regulations before Korean-style hedge funds are introduced.

The removal of scalpers could shrink Korea’s ELW market significantly as day traders account for more than 38 percent of the trading volume ― 616 billion won out of 1.6 trillion won as of June 2010.

The trading volume often exceeded 2 trillion won before the prosecutors’ crackdown on scalpers in March this year, but has frequently dipped below the 1 trillion won mark since.

An ELW is a type of a warrant which gives the holder the right to buy or sell equities from the issuer at a set price within a specific period of time.

The FSC announced on May 19 that it would impose a minimum initial deposit of 15 million won on each investor to deter individuals who bought into the highly risky warrants without fully understanding them.

The authority will also prohibit scalpers’ orders from skipping brokerages’ firewalls while allowing investors to use a private cable.

The prosecutors recently charged several scalpers and employees of brokerages for collaborating on the unlawfully trading of ELWs.

In one case, a Hyundai Securities’ employee identified as Baek provided a separate online trading route to a group of retail investors including a scalper identified as Sohn to help them trade faster than other investors and make huge profits. He is suspected of receiving kickbacks in return.

In late March, prosecutors raided 10 brokerages including Samsung Securities, Woori Investment & Securities and Daishin Securities to investigate similar illegal trading activity.

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