South Korea exchange ups scrutiny of Merrill Lynch trading

South Korea's stock exchange has stepped up its monitoring of high-frequency trading by the Seoul branch of Bank of America Merrill Lynch after local investors complained about alleged unfair stock trades by the US brokerage.

The scrutiny comes after individual local investors filed petitions to the presidential office, saying they suffered huge losses due to large, high-frequency trades and bets against South Korean stocks through the brokerage since last year.

"We are looking into allegations that high-frequency trading of multiple company shares by Merrill Lynch has caused market disruptions," said Chung Seok-ho, a director at the Korea Exchange. "We are checking if there was any unfair trading but we haven't found any serious problem yet."

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Mr. Chung said the exchange was checking any abnormally fast or frequently repeated trades, as well as those automatically driven by algorithms. He said that if serious problems were found, the case would be brought to state prosecutors for further investigation and potential criminal punishment.

BoAML, the parent company of Merrill Lynch International in Seoul, declined to comment.

Local investors have been pressing authorities to look into Merrill Lynch's trading of South Korean shares.

The concern is that retail investors follow the trading patterns of large brokerages, such as Merrill Lynch, but cannot keep up with high-frequency trades and end up losing money when the market quickly turns against them.

"Foreign brokerage Merrill Lynch is deceiving retail investors by manipulating stock prices with cutting-edge algorithmic trading. Stern punishment is needed for massive foreign capital," said a petitioner on the website of the presidential Blue House in late July.

The investors also have objected to the short selling— borrowing shares to sell in the hope that the price will fall — of South Korean stocks by foreign brokerages, which puts downward pressure on prices. Goldman Sachs faces a fine for alleged illegal "naked" short selling — selling without having borrowed the stock — in South Korea.

Although local brokerages are also involved in short selling and high-frequency trading, retail investors in South Korea tend to look to international banks as being more active in the market.

"There could be some side effects from unconditional following of foreign investors' trading patterns. Retail investors could suffer losses if stock prices slide on foreign selling," said Lee Chai-won, head of Korea Investment Value Asset Management.

Analysts said Merrill Lynch's trading pattern was not that different from other stock brokerages and that its high-frequency trading or algorithm-driven trading probably would not constitute unfair trading.

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