Experts warn investors of volatility risk

Just five days remain until Korea’s two main stock exchanges double the daily stock price limits, a state-driven move to boost liquidity and reduce speculative investment.

Starting June 15, the benchmark KOSPI and the tech-laden KOSDAQ will expand the price limits to 30 percent, double the current 15 percent. This is the first revision of its kind in 17 years since the authorities raised the figure from 12 percent to 15 percent in 1998.

While the Korea Exchange, South Korea’s main bourse operator, noted that there are enough buffers to prevent volatility due to of the increased price limits, experts warn that noninstitutional investors on KOSDAQ could face problems..

“Doubling the daily price limits can work differently on KOSPI and KOSDAQ, considering that the latter has more low-cost stocks of small enterprises that can reach the upper and bottom limits in no time,” said an asset manager of a major local brokerage, asking to be identified as Ahn.

“We expect to see more noninstitutional investors borrow collective loans from brokerages, to invest in the small-scale, affordable stocks of KOSDQ on credit, exposing them to the risks of short stock selling,” he added, asking individual investors of KOSDAQ to take due caution of the increased volatility.

Earlier last month, the Korea Financial Investment Association reported that the nation’s credit-based investments reached as high as 3.97 trillion won ($3.64 billion) as of May 20, which accounts for about 3.5 percent of the total capitalization of the KOSDAQ trading. The ordinary wage earners turned to credit-based stock investment for gains amid dwarfing interest gains on bank deposits.

Meanwhile, the authorities introduced some additional regulations as a protection against the risks due to revised stock price limits. The circuit breaker, currently operated once a day, would halt trading for 20 minutes if the benchmark index falls 8 percent and 15 percent each, and shut down the daily session if the index dips more than 20 percent.

In response to the market concerns of the revision, the Financial Services Commission plans to enforce additional policies to save erroneous trading deals by the fourth quarter of this year.

“Regarding the expansion of the stock price limits, we are open to strengthening measures to create a freer and more convenient financial market,” an FSC official said.

By Chung Joo-won (joowonc@heraldcorp.com)