South Korea’s Financial Services Commission (FSC) called off the plan to impose fines on domestic market makers as the punitive move has more or less destabilized market-making activity over the last 10 months that could have helped minimize the fast ebb of liquidity in the market.

FSC’s top decision-making Securities and Futures Committee on Tuesday invalidated the fine of 48 billion won ($37 million) on nine securities firms after disagreeing with the illegality claimed by the Financial Supervisory Service (FSS).

In September 2021, regulatory body FSS accused nine market makers of manipulating stock prices with frequent buy and cancel orders and repeated adjustments in price quotes.

The move drew backlash due to a lack of evidence proving manipulative actions, said a researcher from Korea Capital Market Institute. The Korea Exchange, overseeing market-making activities in the Korean stock market, also could not find any ill-intended actions by the market makers upon separate investigation from September to November 2020.

Data from stock market operator Korea Exchange shows that market-making activity in the Kospi and Kosdaq markets has been at a standstill since September. There is hardly any activity now compared to the first quarter of 2021 when market-making transactions averaged 376.0 billion won a day on the main Kospi market and 48.0 billion won on the junior Kosdaq market.

The trading cost also has increased from ceased market-making activity, said a market analyst.

Market making is a type of trading strategy that allows market makers, such as securities firms, to make calls for buying and selling a particular security and profit from the difference in the bid-ask spread.

The activity helps to cut trading costs for investors by reducing the bid-ask spread, referring to the difference between sell and buy prices. According to the Korea Exchange, quoted bid-ask spread decreased to 0.31 percent in the first quarter of 2019 from 0.40 percent in the fourth quarter of 2018 thanks to market makers, saving trading costs for investors.

As of 2021, there are 14 securities eligible in performing the market maker role for 332 stocks on the Kospi market and 341 stocks on the Kosdaq market.

By Moon Ji-woong and Cho Jeehyun

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