Even SK Hynix Couldn't Avoid Investment Warning... A Closer Look at the Exchange's Market Alert System [News Seolcham]

Market Alert System with Three Stages
One-Day Trading Suspension for Risk Stocks
Issues Include Speculative Surges and Designation of Leading Stocks

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The Korea Exchange Market Surveillance Committee's designation of SK Hynix as an investment warning stock on December 11 has sparked heated debate about the exchange's market alert system. The market alert system was established to caution investors about stocks experiencing rapid price surges. However, there are growing calls for reform, as even leading blue-chip stocks can be designated as warning stocks during a bull market, and speculative funds sometimes rush into stocks that have received caution or warning labels, leading to unintended side effects.

Market Alert System Divides Risky Stocks into Three Stages

Stock indices and other information are displayed on the electronic billboard at the Korea Exchange PR Center in Yeongdeungpo-gu, Seoul. Photo by Yonhap News

The exchange designated SK Hynix as a stock under investment caution on December 8, and then upgraded it to an investment warning stock just three days later, on December 11. The market alert system is divided into three stages based on various criteria: investment caution, investment warning, and investment risk.

First, stocks that experience abnormal and rapid changes in price and trading volume are designated as investment caution stocks. A stock is upgraded to a warning stock if it meets at least one of the following criteria: a super-short-term surge of 100% in three days, a short-term surge of 60% in five days, a short-term surge of 45% in five days with unhealthy trading conditions, a long-term surge of 100% in 15 days, a long-term surge of 100% in 15 days with unhealthy trading conditions, or a super-long-term surge of 200% over one year with unhealthy trading conditions. If a warning stock surges 40% over two trading days, it is elevated to the final third stage, investment risk stock.

The exchange explained that SK Hynix met the super-long-term unhealthy trading condition because: ▲ its stock price had risen more than 200% compared to one year ago; ▲ it recorded the highest closing price among the past 15 trading days; and ▲ for at least four days in the last 15 trading days, the top 10 accounts accounted for a certain threshold of buying activity.

As the market alert level increases, trading restrictions on the relevant stock are gradually tightened. In the case of SK Hynix being designated as an investment warning stock, trading restrictions include a 100% cash deposit requirement for margin trading, exclusion from collateral securities, and a ban on margin purchases. If a warning stock is further elevated to an investment risk stock during the warning period, trading is suspended for one day. If the stock price continues to rise for three consecutive trading days after being designated as an investment risk stock, trading is suspended again for one day.

Prevents Overheating, but Attracts Speculative Funds and Sometimes Includes Blue-Chip Stocks

The market alert system was introduced in 2007 to prevent stock price manipulation, excessive speculative trading, and investor losses due to information asymmetry. The exchange explains that "the system is designed to prevent herd trading by general investors and to raise awareness among potential unfair traders."

While the market alert system helps curb overheating in risky stocks such as skyrocketing stocks and theme stocks, it can also have the unintended consequence of attracting speculative funds, as some investors perceive caution or warning labels as a positive signal.

According to the exchange's database, from December 3 to December 11, a total of 105 companies across KOSPI, KOSDAQ, and KONEX were designated as investment caution stocks. Of these, just over half-60 companies-saw their stock prices decline on the next trading day after designation. However, seven stocks saw their prices surge by 30% to 51% in just one day after being designated as caution stocks.

During the special purpose acquisition company (SPAC) listing boom in May 2021, Samsung SPAC No. 4 was designated as an investment caution stock and then soared by 379.8% over six trading days. At the time, online stock forums were filled with comments such as, "Caution or warning is like a badge of honor," and "Popular stocks get caution or warning labels."

Korea Exchange, Yeouido, Seoul. The Asia Business Daily DB

Another issue is that during an overall bull market, even leading blue-chip stocks-not just theme or skyrocketing stocks-can be designated as investment caution or warning stocks. For example, on December 8, Doosan Enerbility, a major conglomerate ranked in the top 10 by market capitalization in Korea, was designated as an investment warning stock.

The exchange has recognized these issues and has begun research to improve the market alert system. On December 11, the exchange announced, "We are considering revising the criteria for super-long-term surges and unhealthy trading designations among investment warning stocks to use excess returns relative to the market index, rather than simple stock price returns, and to exclude top market capitalization stocks from the designation."