Seoul eyes 'single-price auction' for overheated stocks amid leverage concerns

South Korean financial authorities are exploring enhanced measures to curb the negative impacts of single-stock leverage products on the stock market. Beyond adjusting leverage ratios, regulators are considering options such as implementing single-price auctions for stocks experiencing significant price swings or imposing trading restrictions.

The Korea Exchange's regulations already provide for measures like single-price auctions, which are applied for three trading days to stocks designated as "short-term overheated." These stocks meet specific criteria for price surges, trading turnover, and daily volatility. Trading halts are also possible under certain conditions, such as a company being designated as a management-required stock due to deteriorating financial health or facing delisting.

However, these existing mechanisms are proving insufficient to address situations where volatility escalates due to concentrated trading in specific stocks. The Financial Services Commission (FSC) recently announced its intention to establish a legal basis for "emergency market stabilization measures." These measures would allow for actions beyond single-stock leverage products, potentially encompassing various market participants and sectors.

If the legal framework is established, authorities could, for instance, temporarily switch the trading method for stocks like Samsung Electronics and SK Hynix to single-price auctions if their sharp price fluctuations contribute to overall KOSPI volatility. This move would complement existing macro-level stabilizers like circuit breakers and sidecars, which have been activated an unprecedented nine times on the KOSPI this year alone, underscoring the need for more targeted interventions.

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Micro-level measures like reducing price volatility through leverage ratio adjustments or switching to single-price auctions would complement macro-level stabilization measures (circuit breakers and sidecars) applied to the entire market.