As investors lost big, Korea Exchange and brokerages reaped over 100 billion won on chip ETFs

The Korea Exchange (KRX) and securities firms earned more than 100 billion won ($71 million) in related fees in the roughly two months following the launch of single-stock leveraged exchange-traded funds (ETF), all while many individual investors suffered massive losses.

The KRX and securities firms generated about 117.26 billion won in fees from 16 single-stock leveraged and inverse ETFs tied to Samsung Electronics and SK hynix between their launch on May 27 and the end of July, according to data submitted by the bourse operator and the Financial Supervisory Service (FSS) to Rep. Park Sung-hoon of the People Power Party, a member of the National Assembly’s National Policy Committee.

During the period, securities firms earned a combined 89.4 billion won in brokerage commissions from ETF trading. The KRX collected 24.1 billion won in trading fees and 3.8 billion won in clearing and settlement fees for a combined 27.9 billion won.

Market observers have raised concerns that heavier trading has magnified losses for individual investors while boosting fee income for securities firms.

Citigroup Global Markets Korea Securities estimated in a July 29 report that individual investors had lost $38.7 billion from peak levels through investments in single-stock leveraged products.

FSS Gov. Lee Chan-jin had also voiced concerns about single-stock leveraged products at a press conference in June.

“Extremely high turnover is resulting in securities firms being the only ones to profit,” Gov. Lee said. “I am personally deeply concerned about a situation in which the players gain no real benefit while only the systems managing and operating the market profit.”

As controversy mounted, financial authorities announced additional safeguards for single-stock leveraged products last month. The measures include raising minimum deposit requirements and imposing a limit for individual investors equivalent to about 20 percent of their total investment funds. They also include mandatory investor education and stricter requirements for securities firms to manage discrepancies between ETF market prices and their underlying values.

“While individual investors were exposed to the risks of single-stock leveraged investments, not only securities firms but also the exchange earned tens of billions of won in fee income,” Rep. Park said. “There is nothing inherently wrong with collecting fees when trades take place, but we need to examine whether the exchange properly fulfilled its role as a market overseer while individual investors were being exposed to high-risk products.”

BY JANG GU-SEUL [kim.jiye@joongang.co.kr]