Invest1 publisher3 min readPublished
Korea Exchange eases cash deposit rule for all flagged stocks as retail investors keep buying some anyway
Of 1,548 caution and risk designations since 2022, prices were lower 20 trading days later in 1,050 cases and down more than 30% in 398, while individuals were net buyers of 13 of the 41 stocks flagged in August.
The Investor · Invest desk
What happened
- Korea Exchange data submitted to Rep. Park Sung-hoon's office counted 1,548 investment caution or investment risk designations between 2022 and August, of which 1,429 were caution and 119 the higher risk tier.
- In 398 of those 1,548 cases, roughly one in four, the stock had fallen more than 30% twenty trading days after it was designated.
- KRX escalates its alerts from investment attention to investment caution to investment risk when it detects unusual trading, such as a short-period price run-up or trading concentrated in a few accounts.
- Individuals were net buyers of 13 of the 41 KOSPI and KOSDAQ stocks flagged in August while foreign investors and institutions sold, with the heaviest retail buying in Woori Technology.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- decision Any move to tighten the alert regime again has to be argued against the exchange's own April reasoning, that the cash deposit was excessive by global standards, with the margin ban and halts left as the remaining levers.
- constraint A mechanical sell-on-designation rule would have been wrong in 498 of 1,548 cases, so the flag supports a probability judgement and cannot be sold to retail investors as a certainty.
- exposure In Woori Technology individuals ended up holding what the other two investor groups let go, 85.8 billion won of it, which puts the outcome of the flagged period in retail accounts.
- contradiction The 15.6% average on the top tier and the one-in-four fall of more than 30% across all tiers are drawn from different populations, so reading either as the warning's size misstates the other.
Sort the 1,548 designations by what happened next and four groups appear. Prices were lower 20 trading days after designation in 1,050 cases, or 68% [4]. Declines of 20% or more came in 636 of them [5], which leaves 238 in the 20% to 30% band [1], 414 down by less than 20% [2], and 498 where the price was not lower at all [3].
Two of the figures KRX gave Park's office measure different things. The 15.6% is an average decline across the 119 stocks that reached the investment risk tier [7], under 8% of all cases [5]. The 30% figure is a count of the worst 398 out of 1,548 [6].
The designated population is selected on stocks that had just risen sharply, because a short-term run-up is one of the triggers [3]. That matters for reading the 68%. A fall afterwards fits information in the flag and it fits reversion from the run-up that caused the flag, and separating the two needs a benchmark that the released data does not contain [6].
Woori Technology shows who took the other side. Individuals bought a net 85.9 billion won from the designation on the 11th of last month through the 18th of this month, while foreign investors sold a net 49.2 billion won and institutions 36.6 billion won [9], which is 85.8 billion won between them [7]. The two sides differ by 100 million won on a base of 85.9 billion [7]. The next four names come to 71.5 billion won combined [8]: Sungho Electronics at 22.9 billion [10], Wonik Holdings at about 20.6 billion, OE Solutions at about 14.6 billion and Kumho Electric at about 13.4 billion [11]. That is 14.4 billion less than Woori alone [8].
The rule KRX dropped this year is the one that governed buying into these names. Investors had to post 100% of the purchase amount in cash as a margin deposit to buy a stock under caution or risk designation, and the exchange scrapped that requirement after giving notice of the change in April [12]. KRX said it had taken into account criticism that the rules were excessive compared with global standards, and it kept bans on margin trading and trading halts [13].
"A market alert is not simply a warning label but a safeguard that informs investors who jump late into surging stocks of the risks," Park said [14]. He also said: "Even if regulations are eased, investor protections such as risk disclosure and monitoring of unusual trading must not be loosened as well" [15].
Designation was followed by a lower price in 68% of cases [4] and by a drop of more than 30% in 26% [4]. I would not call that tradeable, because the exchange still halts trading and bans margin on the same stocks [13]. What the release does fix is where the money went: a net 157.4 billion won of individual buying across the five names it identifies [9].
What to watch
- Whether KRX reinstates the cash deposit requirement or extends the easing to the margin trading ban and trading halts it kept.
- The 20-trading-day marks on the 13 August-designated stocks where individuals were net buyers and foreign investors and institutions were net sellers.
- Whether the exchange publishes index-relative returns for designated stocks, which would separate flag information from reversion after the run-up.