SocGen dumps Korean stocks, likely due to client margin calls

Société Générale S.A. (SocGen) on Monday dumped South Korean shares sending their prices to daily limit lows, which local stock market participants suspected was related to its clients’ margin calls.

SocGen sold more than 13,000 shares of Samchully Co. and Daesung Holdings Co. each, as well as over 7,500 stocks of Seoul City Gas Co., according to the Korea Exchange. Stocks of those city gas suppliers tumbled by 30%, the largest decline allowed by the authorities.

The French-based multinational financial services company also unloaded more than 2 million stocks of Harim Holdings Co., some 120,000 shares of Sebang Co., about 340,000 stocks of Daou Data Corp., some 620,000 shares of Daol Investment & Securities Co., and more than 4,300 stocks of Sun Kwang Co. Those shares also plunged by their daily limit.

“We just handled orders from clients,” said a SocGen official in Seoul. “They are not related to any system issues.”

DERIVATIVES

Such massive sell-offs might have resulted from issues related to clients' contracts for differences (CFDs), although it is unclear if those investors are local or foreign, market participants in Seoul said.

A South Korean securities firm reportedly brokered CFD contracts and SocGen was known to have executed the deals, according to the participants.

CFDs allow traders or investors to place a directional bet on the price of a security without actually buying or selling the underlying instrument. If the price goes up, the seller pays the buyer the difference, and vice versa. The contracts allow traders and investors an opportunity to profit from price movement without owning the underlying assets.

In South Korea, investors are allowed to buy and sell stocks with margins of 40% through CFDs while utilizing leverages of up to 10 times depending on the stocks. But they must face margin calls once the funds in their account are below the margin requirement.

“It is impossible for a single brokerage house to dump such volumes at once,” said a domestic securities company source. “SocGen may have forcefully dumped clients’ stocks as their CFD accounts with large-scale leveraged bets started losing money.”

That reminded stock investors in South Korea of the meltdown of a little-known US investment firm, Archegos Capital Management, in March 2021, which caused global banks such as Nomura and Morgan Stanley to suffer billions of dollars in losses.

Archegos was founded by Bill Hwang, a Korean-born American investor, and had assets of around $10 billion but its real stock exposure was much more through CFDs with some reports putting it at $50 billion. The firm collapsed after some of its portfolio stocks significantly fell triggering margin calls from banks.

MASSACRE AFTER HEYDAY

South Korean shares dumped by SocGen are expected to remain under pressure as investors have yet to unload all of them affected by the margin calls, according to stock market sources.

Samchully hit the daily limit low with only 16,725 shares sold by foreign investors; some offers of 263,790 stocks at the price didn't clear. Many sale orders for shares of Seoul City Gas and Daesung could not find buyers.

“The massive offers of those shares must be digested in the market, otherwise, their stocks won’t stabilize,” said a source.

The stocks of three gas suppliers and five other companies, which SocGen sold, were once called cash copy machines due to their strong rallies.

Samchully’s stock price had more than five-folded, while Daesung and Seoul City Gas had nearly tripled since the beginning of last year as natural gas prices surged on Russia’s invasion of Ukraine.

Their shares maintained upward momentum even as the natural resource prices stabilized.

Harim, Sebang, Daou and Sun Kwang – smaller holding companies – had seen more than double or triple jumps in their stock prices without clear bullish factors. Some market participants suspected manipulation of those stocks.

But Daou lost 6.5% on April 21 after its top shareholder sold a 3.65% stake, triggering SocGen’s massive selling, according to stock market sources.

“The securities firm may have disposed of those stocks as a CFD account holding the eight names could not meet the required margin after a margin call,” said another source.

Write to Eui-Myung Park at uimyung@hankyung.com
 

Jongwoo Cheon edited this article.