The South Korean equity linked warrant (ELW) market, which has been barely keeping its head above water in practice, is showing a sign of revival. It once grew to the largest in the world but shrunk dramatically due to the government’s regulations. Now, the recent fluctuations in stock prices are stimulating the ELW market again.
According to Korea Exchange (KRX) on Nov. 14, the domestic ELW market capitalization already exceeded 10 trillion won (US$8.83 billion) this month. It was the first time for the market cap of ELW surpassed 10 trillion won (US$8.83 billion) in six years and 8 months and grew to the same level with 2012 before the market shrunk. The amount of transactions last month, which was “Black October,” also exceeded 3 trillion won (US$2.65 billion) again for the first time in six years, showing a clear upturn.
The domestic ELW market once expanded to the largest in the world that was equal to the ELW market in Hong Kong. ELW was first introduced at the end of 2005 to satisfy the diverse demand of investors and improve the competitiveness of the securities industry. It won popularity to such an extent that the market cap surpassed 30 trillion won (US$26.5 billion) in six years in September 2011. However, the Financial Services Commission (FSC) announced its first measures to make the ELW market sound in October 2010 on grounds of restricting individual investors from indiscriminately entering the market and making losses. It presented the second and third measures in May and September 2011, respectively. However, the financial authorities still believed that investors kept losing money in the ELW market and practically shut down the ELW market by taking the additional measures in 2014.
The decision made not only domestic securities firms but also foreign ones, including Macquarie Securities, withdraw from the market. Currently, the ELW market is led by Korea Investment & Securities and Mirae Asset Daewoo with an 8:2 market share ratio. KB Securities, Shinyoung Securities and NH Investment & Securities have practically pulled out of the market while maintaining their position as an issuer.
In the meantime, the ELW market dwindled significantly. The market cap fell below 10 trillion won (US$8.83 billion) in March 2012 and 3 trillion won (US$2.65 billion) in December 2013. The amount of monthly transactions also dropped below 10 trillion won (US$8.83 billion) over the same period and remained at some 1 to 2 trillion won (US$883.39 million to 1.77 billion) until September.
However, the atmosphere is recently showing a reversal. With stock prices fluctuating due to various unfavorable factors at home and abroad, the ELW market is picking up. Last month, ELW Put items, which made a bet on the decrease in stock prices, showed a whopping 2,100 percent in 15 days, hitting the jackpot.