Protecting Fairness in Financial Markets

The Korea Exchange's Market Oversight Commission has a market system in place to ease stock fluctuations

The Market Oversight Commission (MOC), under the umbrella of the Korea Exchange (KRX), put into place a stock market alert system effective March 12. The revamped system is considered to have a cooling effect on rapid stock price fluctuations caused by speculation or fictitious demand, thus contributing to the protection of investors by minimizing general investors’ losses.
The following are excerpts of an interview between NewsWorld and MOC Chairman Kim Do-hyeong in which he spoke of the market surveillance system, warning & guidance, and other policies.
Question: Will you tell our readers about the MOC's responsibilities?
Answer: The MOC is a self-regulatory organization, established under the Financial Investment Services and Capital Markets Act. The commission is in frontline of the markets of the Korea Exchange (KRX), and its independence and autonomy is guaranteed in accordance with related laws and regulations.
The commission conducts the following three major functions in order to protect the fairness and integrity of the capital markets °™ the KOSPI Market, the KOSDAQ Market, and the Derivatives Market °™ and protect investors from trading abuses.
First, the MOC not only detects unfair trading practices, such as price manipulation and insider trading, but also conducts preventive steps and guidance against these unfair practices. We also carry out investor protection measures such as the issuance of market alerts to ensure market order.
Second, we conduct inspections of member securities and derivatives firms to ensure that they comply with the member obligations specified in the KRX rules and regulations on market order.
Third, the MOC provides dispute mediation services for speedy and mutually satisfactory settlement of disputes between the member securities and derivatives firms and their customers.
Q: Will you introduce the current status of the MOC and the operation of the market surveillance system?
A: The commission is composed of the chairman and four outside non-standing commission members. The MOC has in-house deliberation and advisory bodies °™ the Disciplinary Committee and the Dispute Mediation Deliberation Committee.
The MOC is equipped with advanced IT capable of analyzing trading practices and detecting suspicious or abnormal practices in the markets in real time to ensure the integrity and fairness of the markets. We strive to continuously upgrade the market surveillance system so as to detect and analyze in a speedy manner unfair trading practices that have evolved as well as improve our intelligence in the wake of market growth and changes.
On top of such an advanced surveillance system, we have surveillance personnel versed in the tracking and disclosing of unfair trading practices in a speedy manner, offering prior warnings, and providing guidance as preventive steps against trading orders in danger of leading to unfair trading practices.
Q: What steps are in place against possible unfair practices in spot and derivatives markets taking advantage of expanded stock volatility?
A: Of late, stock markets have seen volatility rise due to external and internal factors, and the sophistication of trading methods such as algorithmic trading has expanded the interactive influence between spot and futures markets. There were price manipulation activities in which some “impure” elements spread rumors to profiteer from the trading of derivatives products with higher leverages.
The MOC is equipped with a system to monitor market volatility such as price freefalls and hikes in a speedy and precise fashion.
Q: What steps does the MOC take against price manipulations via social network services (SNS) such as internet cafes and messengers?
A: The recent development of social network services has brought about unfair practices using the latest services. Some groups have been found to have spread rumors or to have colluded in price manipulation schemes with the intention of swaying price trends.
In this regard, the MOC strengthens surveillance by operating cyberspace surveillance teams and gathering timely market information; we step up collaboration such as information exchanges with police, prosecution, and financial authorities; and we expand social lookout networks by activating an unfair trading practices reporting center.
Q: How do you address window dressing practices?
A: Window dressing is a strategy employed by institutional investors near the financial year end to improve the appearance of a stock portfolio and performances before presenting it to shareholders. Such a practice can disturb market order by artificially pushing up prices and distorting normal prices and may incur damages such as losses to third-party investors.
The MOC has inaugurated a program for exclusively monitoring window dressing practices starting from the end of last year, and has implemented planned surveillance at the end of every quarter.
Institutional investors suspected of engaging in unsound trading practices near quarterly ends are given a warning via member firms. The revelation of any suspicious practice may be scrutinized and if the probability of unfair practices is high, they are to be referred to financial authorities. We strive to continue to proactively conduct preventive steps by closely monitoring market movements, upgrading surveillance programs and offering guidance to institutional investors.
Q: Will you elaborate on the background of the recent introduction of the revamped market alert system and its expected effects?
A: Some stocks closely linked with the trends and incidents of the times have surged abnormally since the second half of 2011. The issue of investment warnings has failed to fully take effect in curbing price hikes, as a few stocks have continued to rise after being put on the list of investment warnings. More stocks are feared to be linked in connection with the April 11 general elections and the upcoming presidential election. A call for revamping the system has been mounted in order to protect many investors by calming down short-term price hikes.
The market alert system was put into practice effective March 12. The revamped system has proved to be activated more speedily than the previous market alert system and is found to be more effective in calming down price fluctuations. The new system is considered to have a cooling effect of stock price hikes, caused by speculation and fictitious demand, thus contributing to the protecting of investors by minimizing general investors’ losses.
Q: Will you explain the MOC's exporting of a market surveillance system developed on its own?
A: It is the first time that we have exported our market surveillance system by signing a contract to export it with the Philippine Stock Exchange (PSE). The program, launched at CMIC, a subsidiary of the PSE is to be put into service in May. We plan to pitch for the program via international conferences.
Q: Will you be specific about the MOC's mid- and long-term plan?
A: The ultimate goal of the MOC is to ensure market order and enhance the fairness and integrity of the financial market commensurate with the standing of an advanced global stock exchange. We will strive to strengthen a regulatory regime so that unfair trading practices can be tracked immediately and given stern punishment, as well as introduce an effective regulatory system to cope with the emergence of new environment changes such as the development of IT and SNS and the diversification of financial products. The MOC will do its utmost in building a sound market order through preventive steps and surveillance activities.

Chairman of the Market Oversight Commission (MOC) Kim Do-hyeong.

The MOC is a self-regulatory organization under the umbrella of the Korean Exchange (KRX). Seen here is the KRX office in Yeouido.