South Korea: Keeping up to speed

Soonghee Lee	Hyun Suk Jung

In early 2011, the prosecutor's office indicted employees of securities firms and scalpers on the charges that, in connection with transactions of the equity-linked warrants (ELW) listed on the Korea Exchange, unlawful devices, schemes and artifices were used. Based on the findings of the prosecutor's office, the employees provided unlawful means prohibited by the Financial Investment Services and Capital Markets Act to the scalpers (such as access to an internal electronic network and exclusive server of the securities firms that are unknown to ordinary investors, implementation of a scalper database, opening of preliminary ledgers, and prioritised provision of market quotations). Both the courts of first instance and appellate courts rendered not guilty decisions for the defendants of the case. The Supreme Court rendered final decisions to the same effect in early 2014. The prosecutor's office claimed that throughout the proceedings: (i) the services provided in connection with this case violated the principle that there must not be any difference in the speed of processing orders; (ii) the defendants provided the services of this case exclusively to a small number of scalpers without notifying other customers; and (iii) there is a substantial likelihood that the profits made by scalpers who used the services of the case in the ELW market would lead to losses of ordinary investors.

In response to the above claims, the defendants responded as follows: (i) the services that the defendants provided are a form of direct market access (DMA) service that are not only allowed worldwide, but which are widespread; (ii) it is a common practice even in Korea for a securities firm to provide a system with faster processing speed for some of the orders, and this is a fact well known to investors. The Supreme Court's decision stated the following: (i) there is no such principle that requires parity in the speed of processing orders; (ii) it is not found that the securities firms provided the scalpers with faster services clandestinely; (iii) there is no risk that the faster services at issue may endanger the profit of other investors; (iv) given that there is no technological method for synchronising the speed of the services, if criminal liabilities are imposed on the acts of the present case, not only would it not solve the problem, but it would further compound the chaos and indiscriminately have a negative effect on various services that may be introduced as a result of development in telecommunications technology.

Critics of the Supreme Court's decisions argued that DMA regulations have become prevalent worldwide. This is based on the International Organization of Securities Commissions requiring the same processing speed of electronic orders for all customers (1990) and the announcement of DMA regulations by the US Securities and Exchange Commission and Commodity Futures Trading Commission in 2010. However, securities firms expect no further issues as long as they sufficiently inform customers of the differing speeds of their services.

Soonghee Lee and Hyun Suk Jung

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