FSS Examines Whether Retail Investors Were Unfairly Treated in SK hynix ETF Case

South Korea's financial watchdog, the Financial Supervisory Service (FSS), is investigating whether retail investors were treated unfairly in the aftermath of an abnormal price surge in a leveraged exchange-traded fund (ETF) linked to SK hynix. Financial Supervisory Service Governor Lee Chan-jin confirmed the review on October 22, stating that the agency is examining if individual investors were singled out for different treatment compared to institutional investors, who had their losses covered through corrections of mistaken trades.

This investigation follows the ETF's abnormal price movement on June 8, when SK hynix shares dropped 7.68%, but the leveraged ETF, designed to double the stock's daily return, spiked by 49.7%, closing at 30,000 won. This resulted in a premium or discount to its net asset value (NAV) that exceeded 85% at its peak. The controversy stems from the fact that while institutional investors' losses were addressed through erroneous-trade corrections, individual investors were forced to absorb losses exceeding 40% the following day.

The FSS has confirmed that the incident involved a liquidity provider (LP) placing and subsequently canceling a buy order, creating a gap in available quotes, affecting 1,081 ETF shares held by individual investors, totaling approximately 12 million won in losses. Rep. Park Dae-chul suggested during the audit hearing that a rush in institutional buy orders during the closing auction led to retail investors purchasing the ETF at inflated prices.

The fairness issue also extends to the product's screening process, with critics questioning whether the ETF was rushed to market. The listing review process was reportedly shortened from the usual 61 days to 29 days. Lee Chan-jin rejected these allegations, stating that the statutory review period was 15 days and that regulators thoroughly evaluated the product's structure and risks during the registration statement review before approving it.

Additionally, concerns over inadequate investor safeguards emerged, with Rep. Kim Jae-seop pointing out that cumulative losses for individual investors since the product's launch amounted to 6.313 trillion won, particularly affecting those in their 40s and 50s. He argued that the initial safeguards, including a minimum deposit of 10 million won and a mandatory one-hour training session, were insufficient to protect investors from such high-risk products.

Financial authorities expressed regret over the investor harm and pledged to pay closer attention to investor protection and market stability, with Lee Eok-won, chairman of the Financial Services Commission, apologizing to the public and reflecting on the responsibilities of financial supervisory authorities.