[Exclusive] Stock Manipulation Rampant... Only 27 Cases of Unfair Trade Detected This Year

[War on Stock Price Manipulation]① "Limitations in Detecting Intelligent and Advanced Crimes with Existing Systems and Personnel"
"Ongoing Investigations of Unfair Trading Are Excluded from Detection Counts... It Also Takes Time from Detection to Action"

Following the stock price crash triggered by Societe Generale (SG) Securities and the subsequent plunge to the lower limit in five stocks, a series of suspected market manipulation crimes have recently occurred. Amid this, it has been revealed that the Korea Exchange's market surveillance system, the primary system for preemptive monitoring, did not function properly. While stock manipulation crimes are evolving daily, the market surveillance system has failed to keep pace, rendering it virtually ineffective against 'new types of stock manipulation tactics.'

Appearing as a Combination of Multiple Unfair Trading Practices

On the 29th, Asia Economy analyzed exclusive data on unfair trading review performance from the Korea Exchange Market Surveillance Committee, obtained through the office of Yoon Young-duk, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea. The analysis showed that as of the 16th of this month, the number of unfair trading cases detected by the Market Surveillance Committee through the system this year was only 27. This is a significant decrease compared to 109 cases in 2021 and 105 cases in 2022.

Looking more closely at the types of unfair trading allegations, the situation appears even more serious. The classification criteria for complex unfair trading allegations are centered around representative charges in the order of 'fraudulent trading → market manipulation → insider trading → reporting obligation violations → others (short-term trading profits, disruptive acts).' In particular, recent unfair trading has become increasingly sophisticated, often involving combinations such as 'fraudulent trading + market manipulation.' Accordingly, fraudulent trading is further subdivided into fraudulent trading + market manipulation, fraudulent trading + insider trading, and market manipulation into market manipulation + insider trading. The Korea Exchange does not disclose the performance of unfair trading reviews. According to the exclusive data obtained this time, the number of market manipulation cases this year is zero. Cases involving market manipulation + insider trading are also zero.

Regarding this, the Korea Exchange explained, "We are operating two task forces (TFs) to respond to the SG Securities-induced stock price crash incident, with five members supporting the joint investigation team and 20 members supporting a full investigation of Contracts for Difference (CFD) accounts. The full investigation is scheduled to continue for about two months until early July, and once completed, the number of detected unfair trading cases is expected to increase." They added that ongoing investigations are not included in the detected case count, and it takes time from detection to action.

According to the Capital Market Investigation Work Regulations, the unfair trading surveillance system, including market manipulation, consists of the stages 'review → investigation → prosecution.' The first stage, review, is the responsibility of the Korea Exchange. Financial authorities typically begin investigations immediately after the Korea Exchange analyzes suspicious transactions and notifies them. The Korea Exchange thus acts as the first watchdog to detect unfair trading activities. Generally, the unfair trading surveillance system proceeds in the order of Korea Exchange Market Surveillance System 'CAMS' → Financial Services Commission and Financial Supervisory Service → Seoul Southern District Prosecutors' Office Securities Crime Joint Investigation Team → (in cooperation with the prosecution) Financial Supervisory Service Capital Market Special Judicial Police (Special Judicial Police). Therefore, the role of the Korea Exchange Market Surveillance System is the most critical.

Last year, the Market Surveillance Committee reported 22 cases of fraudulent trading and 18 cases of market manipulation to financial authorities. This year, 15 cases of fraudulent trading were detected, but no market manipulation was detected. The review performance excluding fraudulent trading also dropped significantly. Insider trading cases were 77 in 2021, 56 in 2022, and only 11 this year. Reporting obligation violations were zero this year.

In this regard, the Korea Exchange Market Surveillance Committee stated, "Recent unfair trading has become increasingly sophisticated, often combining multiple unfair trading types. When compiling statistics, fraudulent trading combined with market manipulation was classified as fraudulent trading, so standalone market manipulation cases appear relatively few." They added, "Especially since fraudulent trading cases themselves are vast and involve large amounts, the review process takes considerable time. Focusing on these means that although the simple numbers may be low, the scale and amounts involved can be large."

Majority of Market Alerts Issued to Prevent Unfair Trading

Even considering the statistical classification, it is difficult to understand that no market manipulation cases were detected when market alert measures suspected of unfair trading have already been issued this year at more than half the level of last year.

The purpose of the Korea Exchange market alert system is to prevent unfair trading. Market alerts notify investment risks for stocks where trading is concentrated in a few accounts or stock prices surge sharply over a certain period, indicating potential unfair trading. The system is divided into four stages: 'Investment Caution → Investment Warning → Investment Risk → Trading Suspension.' Last year, a total of 2,062 market alerts were issued, a 21% decrease from 2,599 in the previous year. This decline is attributed to reduced trading activity as the stock market contracted due to interest rate hikes. This year, 1,259 alerts have already been issued before the first half of the year ended.

The problem is that the Korea Exchange did not request a single disclosure inquiry over three years for the eight stocks that hit the lower limit following the SG Securities incident. Regarding this, a Korea Exchange official stated, "To strengthen preemptive unfair trading prevention activities, we are closely monitoring changes in the market environment and continuously analyzing operational effectiveness to actively reflect them in system operations."

However, it seems difficult to avoid criticism that efforts to strengthen the market surveillance system have been insufficient. There is a strong voice that as securities crimes have become more sophisticated, the system should have evolved accordingly. Moreover, the personnel dedicated to the Market Surveillance Committee have steadily decreased. The number of staff in the Market Surveillance and Review Department, which first detects and analyzes unfair trading, declined from 67 in 2018, 66 in 2019, 65 in 2020, 60 in 2021, to 59 in 2022.

The Market Surveillance Committee is a self-regulatory organization of the exchange established under Article 402 of the Capital Markets Act to maintain fair trade order and protect investors. It consists of a five-member committee including the chairman and an operational organization called the Market Surveillance Headquarters. The Market Surveillance and Review Department under the headquarters performs real-time monitoring and extraction of unfair trading. The Market Surveillance Department handles real-time monitoring, while the Review Department is responsible for detailed analysis. When the Market Surveillance Department detects and analyzes suspicious cases of unfair trading such as market manipulation in real time and judges there is a likelihood of unfair trading, it requests a review from the Review Department. Over the past five years, the Market Surveillance Department's staff decreased from 26 to 23, and the Review Department's staff from 41 to 36.

A Korea Exchange official explained, "Some personnel moved to the short-selling dedicated department newly established in early 2021, which caused a reduction in staff. However, since short-selling tasks were previously handled by the Market Surveillance and Review Department, the actual surveillance personnel have been reinforced."

Efforts Needed to Shift to a Preemptive Detection System

Assemblyman Yoon Young-duk emphasized, "To build and maintain trust in the financial market, it is necessary to have thorough market surveillance by supervisory authorities, strong criminal penalties for unfair trading cases, recovery of criminal proceeds, and strict law enforcement will." Jeong Ui-jeong, president of the Korea Stock Investors Association, said, "In the era of 14 million investors, investor protection is more important than ever, yet accidents continue to occur to the extent that the capital market is called a 'republic of financial crimes.' The existing system and personnel have limitations in detecting increasingly sophisticated and advanced crimes." He added, "To eliminate the temptation of crime, legislation strengthening penalties, such as those allowing hundreds of years of imprisonment like in the United States, is necessary. We should leverage the advantages of being an IT powerhouse to build an advanced AI-equipped detection monitoring system and focus on transitioning to a preemptive detection system that guards the gates."