‘Scalping’ to be halted in ELW trades

Scalping, a trading strategy that attempts to earn large profits on small price changes and very fast trading, will not be allowed in the domestic Equity Linked Warrant market starting next year.

Scalpers buy or sell a number of shares at a bid price and then quickly sell them at a few cents higher for a profit.

According to a high-ranking official yesterday, the Financial Services Commission has decided to regulate scalping to avoid too much volatility in the ELW market as part of a reform in the Capital Market Act.

The new regulation is expected to take effect next year.

The ELW market trades a kind of derivative financial product.

The scalpers’ rapid trades can manipulate the market. But scalpers can’t be punished unless an attempt to deceive other traders is proven.

By trading stocks dozens or hundreds of times a day, they cause large fluctuations in the market. And slower retail investors get burned by such fluctuations.

“Once hedge funds are launched in the local market within this year, new kinds of illegal trading activities are expected to occur,” said an FSC official. “So we are going to drastically reform a regulation related to illegal activities by studying cases in other countries.”

The FSC said that the new regulation won’t fully prohibit scalping, meaning regular program trading that involves scalping will still be allowed.

The financial regulator has not determined how to distinguish regular program trading from market manipulation by scalping.

Local brokerages are unhappy with the idea. Scalpers are big customers.

According to the Korea Exchange, trading by retail investors who were considered scalpers accounted for 34 percent of ELW trading as of August last year.

By Jung Jae-yoon [jyj222@joongang.co.kr]