Korea’s financial authorities are moving to deal sternly with stocks that move drastically in tandem with politician-linked rumors and other artificial factors.

The Korea Exchange, which runs the KOSPI and KOSDAQ, said Wednesday it is considering halting the trading of shares immediately when they receive official investment warnings.

The plan comes as a series of local stocks climbed erratically mainly due to market rumors and speculation generating a wide range of “themes,” including the political stock group that supposedly tracks presidential candidates for the election later this year.

“What’s being considered is that the trading of stocks should be suspended when they get an investment warning,” an official at the KRX told the local press. “In principle, all shares are subject to such suspension if the plan gets implemented, but the penalty might be imposed mostly on theme-based shares that tend to go up unusually.”

The KRX and other financial policymakers plan to take additional measures to impose order in the stock market if the thematic share groups continue to distort market conditions.

Under current regulations, if a share is classified at investment warning level, other conditions should be met before the authorities suspend it to protect investors. Instead of this time-consuming procedure, the KRX is considering an immediate suspension of the theme-based stocks when their movement goes out of the normal range.

But the easy suspension of stocks on the bourse might spark complaints from local investors, many of whom routinely follow the theme-based stock groups to make profits. In fact, local brokerages have long been producing reports that put together a host of shares under a certain theme in response to social and economic trends.

Another possible punitive measure involves the handling of orders by brokerages. Currently, securities houses have to go through four-stage procedures to reject irregular trading orders. By simplifying the process, the KRX said brokerages would be able to take quick action against problematic orders.

The KRX said the new regulations would go into effect as early as February, but stressed that it has to obtain approval from other financial regulators to finalize the plans.

Recently, politically sensitive stocks have caused public concern. A group of shares believed to be linked to presidential candidates went up sharply even though their financial and earnings status did not show any improvement. The phenomenon has been intensifying ahead of parliamentary and presidential elections this year.

The Financial Supervisory Service has launched a special team to investigate the politically-themed and other problematic shares to minimize damage to ordinary investors. There are about 80 stocks under the theme of political figures or elections, many of which demonstrated abnormal stock price movement in recent months.

The rapid rise of theme-based shares is encouraging individual investors to snap up the rumor-infested shares without considering their valuation. Once their share prices go down, many investors are feared to suffer great losses. 

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