Hot money on currency market and risky bets on derivatives on the rise


With the local stock market riding a wave of volatility in recent weeks, speculative transactions have increased at an alarming pace, the country’s financial regulators warned on Sunday.

Although it is often difficult to distinguish speculation and investment in the profit-oriented finance industry, international hot money and other risky bets that are clearly leaning toward speculation are on the rise not only in the main bourse, KOSPI, but also in derivatives and currency markets.

According to Korea Exchange, the Financial Supervisory Service and the latest banking data, even traditionally conservative insurance firms are resorting to extremely short trades in the bond market and signs of foreign hot money are being detected in the foreign exchange market.

On the stock market, speculators are attempting to artificially boost stock prices in a certain sector by amplifying rumors regarding the elections.

Murky trades of financial instruments are nothing new in the fiercely competitive and ruthless world of profit-hungry investors, but manipulative deals could hurt ordinary investors, the regulators said.

The ominous trend also intensified noticeably after the country recently swallowed a barrage of bad news including the sovereign debt woes in the eurozone and an increased possibility that the U.S. might slip into recession.

The Korean stock market’s average swing stood at 2.78 percent from Aug. 6-15, a level similar to that of French, whose key banks saw their share prices plunging due to the credit rating downgrade. The average movement of the Dow Jones index in the U.S. during the cited period was smaller at 2.32 percent.

Such wide gyrations in the local stock market are partly linked to the peculiar makeup of market players. Foreign investors account for a whopping 31 percent while the figure for India and China is 19 percent and 9 percent, respectively.

What also concerns the country’s policymakers is a growing number of suspicious deals on the currency market in which foreign investors buy U.S. dollars quickly to boost their rate and then dump them to pocket sizable profits.

The value of offshore transactions of the Korean won and the greenback also jumped to $2.5 billion daily, accounting for about 30 percent of the total currency trades. Normally, the proportion is less than 10 percent.

A sign that panicky investors are increasingly turning into speculators is that hedge trades designed to reduce risks are shrinking fast while investors place wild bets on the derivates market.

Korea Exchange data shows that KOSPI200 put option trades amounted to 4.7 trillion won on Aug. 9, setting a record. Call option trades hit a record 1.8 trillion won on Sept. 1. The volatility in the stock market is said to have sparked a rise in derivatives trades.

Financial regulators are also keeping tabs on a host of stocks that showed sudden spikes in the past weeks in connection with political developments in the nation, particularly the forthcoming by-election for Seoul mayor.

By Yang Sung-jin (insight@heraldcorp.com)