The Korea Exchange (KRX) flagged three single-stock leveraged exchange-traded funds (ETFs) based on SK hynix as issues to watch for investors. It appears to be due to a surge in the premium/discount rate following abnormal transactions that occurred just before the previous day's market close.
On the 9th, according to the Korea Exchange (KRX), at about 9 p.m. on the previous day, three ETFs — ▲ACE SK hynix Single-Stock Leverage ▲1Q SK hynix Futures Single-Stock Leverage ▲KIWOOM SK hynix Futures Single-Stock Leverage — were flagged as issues to watch for investors.
All of these products are leveraged ETFs that track SK hynix's daily return in the positive direction at two times. In a disclosure, the exchange said the "real-time premium/discount rate at market close was at least twice the required management threshold," explaining the reason for the flag.
Under exchange rules, items subject to investor-caution management go through the steps of "flagging → designation notice → designation." If a flagged item is flagged again within 10 trading days, it can move to the investor-caution designation notice stage. Once finally designated as an investor-caution item, single-price auctions in three-trading-day units are applied, and trading may be halted.
This flagging appears to be related to a price distortion phenomenon that occurred in some single-stock leveraged ETFs just before the previous day's close. Although SK hynix shares fell about 8% the previous day, ACE SK hynix Single-Stock Leverage spiked just before the close, at one point posting a gain close to 50%. It was an unusual situation in which the underlying asset and the ETF price moved in opposite directions.
The abnormal transactions were found to have occurred as market-making quote obligations for liquidity providers (LPs) are exempt during the call auction period. Typically, ETFs rely on LP quotes to temper the widening of the premium/discount between market prices and net asset value (NAV), but that obligation does not apply during the closing call auction from 3:20 p.m. to 3:30 p.m. During this window, market buy orders flowed in, reportedly sending some products' prices sharply higher.
An exchange official said, "It appears that single-stock leveraged ETFs were flagged as issues to watch for investors due to the impact of orders executed during the closing price formation window, when LP quote obligations did not apply, on the previous day."