South Korea’s National Assembly Legislation and Judiciary Committee, during its annual audit of the Financial Services Commission, focused intensively on allegations of market manipulation by high-frequency trading (HFT) firms involving single-stock leveraged ETFs (exchange-traded funds) and the Korea Exchange’s failure to properly supervise and regulate them. With HFT trading volume reaching 40% of total market turnover—and foreign accounts accounting for 85% of that figure—lawmakers criticized the exchange for failing to crack down on these players, allegedly out of concern for its own fee revenue.

Rep. Kim Hyun-jung of the Democratic Party said during the audit on the 8th that while she sympathizes with the original purpose of launching leveraged ETFs, the core issue in this scandal lies not in product approval but in the HFT players exploiting the structure and the Korea Exchange’s failure to manage them.

She raised suspicions that certain HFT firms exploited the end-of-day rebalancing mechanism of leveraged ETFs to extract profits. Leveraged ETFs adjust their holdings near market close to track a multiple of the underlying asset’s daily return. HFT firms allegedly anticipated this trading demand, artificially drove down prices, and then bought the shares that ETFs were forced to sell at depressed prices.

Specifically, Rep. Kim explained that the pattern involved large sell orders before market close or repeated order submissions and cancellations to push prices down, followed by buying the flood of shares dumped during the end-of-day rebalancing at bargain prices. “Leveraged ETFs are mechanically forced to sell stocks at market close on days when prices fall in order to rebalance, and HFT forces exploited this by driving prices down with large sell orders in the afternoon, then buying back the shares that flood in at the closing auction at cheap prices—repeating this pattern to generate easy profits,” she said.

She argued that such HFT trading constitutes market manipulation and market order disruption under South Korea’s Capital Markets Act, while adding that actual illegality must be confirmed through investigation of trading records and order patterns.

Surge in HFT Trading and the Exchange’s Conflict of Interest

According to data presented by Rep. Kim, HFT trading volume from January to August this year reached approximately ₩6,500 trillion ($4.9 trillion), accounting for 40% of total market turnover. Foreign accounts represented approximately 85% of this figure. Monthly average HFT trading volume was ₩2,700 trillion ($2.0 trillion) from January to May, before the listing of single-stock leveraged ETFs, but surged approximately 56% to ₩4,200 trillion ($3.1 trillion) from June to August after their listing.

She pointed out that despite circuit breakers being triggered three times and sidecars eleven times during this period of extreme market volatility, the exchange took no disciplinary action or made any detections. The implication is that because HFT players represent 40% of stock and derivatives market turnover—making them massive customers—the exchange’s surveillance has inevitably been passive.

The exchange’s revenue structure also came under fire. Last year, the Korea Exchange’s fee-related operating revenue was approximately ₩800 billion ($598 million), raising concerns about a potential conflict of interest between its public function of market surveillance and its commercial objective of revenue growth. Rep. Kim particularly alleged that all 16 companies participating in the Korea Exchange’s derivatives-related advisory bodies are foreign firms, of which seven are specialized HFT firms. The remaining companies, she explained, are also foreign financial institutions that handle HFT orders.

She raised questions about whether it is appropriate for companies that are subject to market surveillance to participate in the exchange’s key advisory bodies. She also mentioned Citadel Securities, a U.S. brokerage that was previously fined ₩11.88 billion (approximately $8.9 million) by South Korean financial authorities for market order disruption. The issue is that a firm with a sanctions history participated in the exchange’s advisory bodies.

Questions Over Exchange Data Reliability

Rep. Kim also raised doubts about the reliability of data the exchange submitted to the National Assembly and financial authorities. She alleged that when the exchange submitted HFT trading volume data, it only included proprietary trading by the relevant firms, thereby understating the actual trading scale. The point is that if the exchange responsible for market surveillance cannot even submit accurate data to the National Assembly and financial authorities, its supervisory function cannot be trusted.

“Unless the exchange’s governance structure is resolved, a second and third single-stock leveraged ETF scandal is inevitable,” she said, proposing as an alternative the separation of the exchange’s public functions into a separate independent body. She also called for a full investigation of ETF rebalancing-related trading to sanction accounts and member firms that participated in market manipulation.

In response, FSC Chairman Lee Eok-won said that unfair trading is being monitored on an ongoing basis and that immediate action will be taken if any illegal activity is discovered. Regarding Citadel Securities, he explained that the firm has been excluded from the advisory bodies due to its past fine.

On the need to improve the exchange’s governance structure, he said, “We will examine how other countries manage the exchange’s public and commercial functions, along with the pros and cons of different institutional arrangements.” He reaffirmed that the exchange conducts continuous monitoring of HFT unfair trading and that authorities will respond immediately if illegal activity is found under stricter scrutiny.

Meanwhile, Rep. Song Eon-seok of the People Power Party requested that Korea Exchange Chairman Jeong Eun-bo be called as a witness regarding HFT trading surveillance. Legislation and Judiciary Committee Chairman Yoo Dong-soo asked the floor leaders of both parties to coordinate so that the matter can be addressed during the comprehensive audit.