LP dedicated headcount at 24 brokerages ranges from 1 to 6 per firm

People Power Party lawmaker Park Sung-hoon [provided by Park's office]
People Power Party lawmaker Park Sung-hoon [provided by Park's office]

Single-stock leveraged and inverse exchange-traded funds — products already flagged for their potential to amplify volatility in domestic markets — are operating without any minimum staffing requirements for liquidity providers, a new review has found. At some brokerages, a single LP is managing more than 10 million units in daily transactions, raising questions about whether market safeguards can function properly during sharp swings.

According to data submitted to People Power Party lawmaker Park Sung-hoon of the National Assembly's Political Affairs Committee by the Korea Financial Investment Association, the 24 brokerages that submit liquidity-provision asking prices for the 16 single-stock leveraged and inverse ETFs listed domestically employ between one and six dedicated LP staff per firm. Most firms have just two or three.

Among individual brokerages, Daol Investment & Securities recorded the highest per-person workload. Its sole dedicated staff member handles an average of 15.34 million units per day.

At Kiwoom Securities, two staff members each manage an average of 10.80 million units daily. The figures at other firms were: Hanwha Investment Securities, 8.81 million units (two staff); BNK Investment Securities, 4.66 million units (four staff); LS Securities, 4.23 million units (one staff); Yuanta Securities Korea, 4.02 million units (three staff); and Mirae Asset Securities, 3.77 million units (four staff).

Liquidity providers continuously quote bid and ask prices for ETFs to facilitate trading and prevent excessive divergence between market prices and the value of underlying assets. For leveraged and inverse products — which track price movements at a multiple — the ability to respond quickly is especially critical given their heightened volatility.

The core problem is that single-stock leveraged and inverse ETFs were introduced without any separate minimum staffing standard for dedicated LP personnel. Korea Exchange regulations contain no requirement specifying a minimum number of LP management staff.

Single-stock leveraged ETFs track the daily return of a specific stock at a set multiple. Unlike ordinary ETFs, investment risk is concentrated in a single issue, and the addition of leverage means that large moves in the underlying asset can sharply magnify losses.

If LP capacity is insufficient, hedging could be delayed during sudden market moves, and the spread between bid and ask prices could widen. There are also concerns that errors in quote submissions or system failures could go unaddressed in a timely manner.

Questions have also been raised about whether adequate institutional safeguards were in place to assess risks before these products were introduced. Critics say independent stress testing and other verification mechanisms were lacking ahead of the launch of single-stock leveraged ETFs, suggesting that safety measures failed to keep pace with the push to bring high-risk products to market.

"A structure in which a single LP staff member handles tens of millions of units in a highly volatile single-stock leveraged ETF market can expose the system to financial accidents and poor management of price divergence," Park said. "Financial regulators and the Korea Financial Investment Association must establish appropriate LP staffing standards commensurate with each brokerage's transaction volume and risk level, and review broader measures to improve the health of the ETF market."


mp1256@heraldcorp.com