On July 19, 2022, the Securities and Futures Commission of Korea (the "SFC") deliberated and concluded that the alleged market disruption by nine securities firms which are market makers in the stock market cannot be deemed illegal and is not subject to administrative fines.
* Market makers supply liquidity to the market pursuant to the market making agreement executed with the Korea Exchange (the "KRX") and submit two-way orders for the designated stocks in both sell and buy directions, in accordance with the terms and conditions of the market making agreement.
On September 1, 2021, the Financial Supervisory Service (the "FSS") issued an advance notice imposing administrative fines of KRW 48.7 billion in total (KRW 1.2 billion to KRW 9.66 billion of fines for respective market makers) on nine domestic and foreign securities firms on the ground that repeated amendment and cancellation of orders submitted by market makers constituted a violation of Article 178-2 (Violation of Prohibition of Market Disruption) of the Financial Investment Services and Capital Markets Act.
Starting immediately after the FSS's advance notice, Kim & Chang, on behalf of a number of market makers, continually submitted opinions and materials through comparative legal review, trading analysis, and legal review on the market making system, and Kim & Chang lawyers attended the Capital Markets Investigation and Review Committee meetings and the Securities and Futures Commission meetings to actively defend the case for the market makers. Specifically, Kim & Chang strongly argued, among others, that: (i) it is inevitable for the market makers to amend and/or cancel their orders in order to reflect changes in market conditions; (ii) the amendment and cancellation ratios for orders submitted by Korean market makers is not particularly high considering the similar ratios of exchanges in other countries such as the US; and (iii) upon analysis of the trades identified by the FSS, the orders did not have any unfair impact on the market price.
As a result of deliberations at a total of six meetings, including four Capital Markets Investigation and Review Committees, the SFC accepted Kim & Chang's arguments and finally concluded that the amendment and cancellation of market making orders did not constitute market disruption because it was difficult to deem that such amendment and cancellation had an unfair impact on the market price.
The SFC's decision is likely to serve as an important precedent in determining whether there is an act of market disruption, i.e., whether a particular order is illegal and whether it has an unfair impact on the market price. It is also likely to serve as a meaningful reference for market participants, including securities firms that engage in similar trading activities using algorithms.
Going forward, in order to resume market making activities as soon as possible and also to enhance the effectiveness of the system, the Financial Services Commission and the KRX will look for systemic improvements and strengthen their review of potential unfair trade practices in market making activities. In addition, the financial regulators have announced their intention to more efficiently conduct market surveillance for algorithm trading.
