Foreign high-frequency trading firms accounted for 36.9% to 49.9% of total trading volume in South Korea's top four single-stock leveraged ETFs tracking Samsung Electronics and SK Hynix since listing through the previous day, according to Korea Exchange data released on the 10th. Financial industry officials identified foreign HFT as a key factor amplifying volatility because these traders can access ETF creation and redemption rights through securities firms without the market-making obligations imposed on domestic liquidity providers. The debate centers on whether restricting foreign HFT creation and redemption authority would reduce extreme price swings in these products.
Foreign HFT Dominates Trading Volume in Single-Stock Leveraged ETFs
Korea Exchange data showed foreign trading represented between 36.9% and 49.9% of total volume in the four highest-volume Samsung Electronics and SK Hynix single-stock leveraged ETFs from listing through the previous day. Industry sources estimate the vast majority of this foreign trading comes from HFT firms using Direct Market Access (DMA) lines provided by securities companies. High-frequency trading refers to algorithmic trading methods that transmit orders at ultra-high speeds to capture profits. These traders characteristically repeat "buy-sell-buy-sell" patterns, taking and liquidating positions in short timeframes to earn spreads. While their active ultra-short-term trading generates substantial volume, the actual amount flowing to ETF creation and redemption remains minimal because they close most positions near market close.
Creation and Redemption Access Differs Between Foreign HFT and Retail Investors
Investors point to the creation and redemption access rights granted to foreign HFT but denied to retail investors as a key distinction. ETF creation and redemption authority belongs to Authorized Participants (AP) — securities firms — meaning retail investors can only buy and sell ETFs on the exchange and cannot create or redeem shares. However, foreign HFT effectively gain creation and redemption rights through securities firms. This access exists because HFT's active arbitrage trading provides liquidity benefits to markets. When ETF prices trade above net asset value (NAV), creation supplies new ETF shares to the market; when prices fall below NAV, redemption withdraws ETF shares by purchasing them from the market, returning prices to appropriate levels. This process narrows the gap between ETF prices and NAV while increasing market liquidity.
Industry Officials Describe Pre-Positioning Strategy Concerns
Financial investment industry officials stated the situation changes when markets move strongly in one direction. For example, if Samsung Electronics stock surges 5% intraday, Samsung Electronics leveraged ETFs must purchase large quantities of Samsung Electronics shares near market close to maintain target leverage multiples. Market participants can reasonably predict this rebalancing direction. The financial investment industry pointed out foreign HFT can exploit this predictable rebalancing. "When situations arise where leveraged ETFs must buy and sell on a large scale, the possibility increases that foreign HFT will use those trades in advance to earn profits," said one asset management official. "When the asset manager that is a major buyer and seller moving stock prices buys expensively, market volatility inevitably increases." The industry specifically notes only foreign HFT can achieve effective "short-selling effects." Because retail investors cannot create or redeem, they cannot sell shares first and match the quantity later, but foreign traders can.
For instance, when SK Hynix stock surges, securities firm liquidity providers must raise their sell quotes for SK Hynix leveraged ETFs to match prices. However, HFT quickly executes against existing quotes before LPs adjust prices upward, securing ETF shares. They then sell SK Hynix underlying shares first during the session to take opposite positions. This allows them to buy ETFs cheaply and sell underlying shares at market prices for profits. "Foreign HFT have lighter systems compared to domestic securities firms managing quotes for many stocks, so they can respond quickly," said one asset management executive. "Trades often occur under conditions favorable to HFT by differences of 0.001 seconds."
Financial Firms Propose Restricting Foreign HFT Creation and Redemption Rights
Industry participants argue restricting foreign HFT creation and redemption would effectively limit trading volume in single-stock leveraged ETFs. "The intent is to reduce factors that amplified trading volume rather than delisting products," said one securities firm official. "Just restricting foreign creation and redemption would significantly reduce trading volume from current levels." The official added, "Trading that repeats same-day creation and redemption should be considered trading without creation purpose from the start."
Securities Officials Defend HFT Role in Market Efficiency
Market participants also present substantial counterarguments against viewing foreign HFT as the primary cause of volatility. They argue HFT actually increases market efficiency by quickly resolving price gaps between ETFs and underlying assets and tightening bid-ask spreads. The explanation states that as foreign investors and trading volume increase, HFT also flows in together, and their arbitrage trading prevents ETF prices from diverging significantly from NAV. "Foreign high-frequency trading firms should enter the domestic market in greater numbers," said one securities firm official. "As professional arbitrage participants increase, quotes become tighter and price discovery functions strengthen. Restricting foreign creation and redemption would reduce trading volume but raises concerns about widening tracking errors and declining liquidity."
FAQ
What percentage of trading volume do foreign HFT account for in Korean single-stock leveraged ETFs?
According to Korea Exchange data released on the 10th, foreign traders accounted for between 36.9% and 49.9% of total trading volume in the top four Samsung Electronics and SK Hynix single-stock leveraged ETFs since listing through the previous day. Industry sources estimate the vast majority of this foreign trading comes from high-frequency trading firms.
Why do industry officials propose restricting foreign HFT creation and redemption rights?
Financial industry officials argue foreign HFT can exploit predictable ETF rebalancing by pre-positioning trades before asset managers execute large orders near market close. One asset management official stated that restricting foreign creation and redemption would effectively limit trading volume in single-stock leveraged ETFs without requiring product delisting. However, securities firm officials counter that such restrictions would reduce liquidity and widen tracking errors.
