Algo gone wild again in the Kospi index options in Seoul yesterday. The Korean broker Hanmag Securities confused calls with puts and did so in an automated matter. Their prop desk placed a program order right after market open.

The story is : selling for a few KRW per contract, while buying for a few thousand KRW. Comparable with Knight Trading, however it lasted only for a few minutes. Impacted strikes were the 215-250 calls and the 270-287.50 puts.

Estimated losses are above 40 million USD. Firms pocketing the money will most likely be the foreign liquidity providers, given the nature of their business (in other words : not delta punting). Jump, Optiver, IMC, SIG, Virtu and some smaller firms will have had a fine day. Other firms with a nice end of the year result could be Ingensoma, ARK (former Tibra traders) and Quiet Light. Rumor has it Getco left the Kospi a month ago.

Hanmag requested the KRX for an Error Trade Bail-out, but this was rejected as it didn't meet the error trade requirements. My knowledge of the Korean mistrade regulations is fairly limited, but given the fact the trades have been executed against unrealistic prices this puzzles me.

There is a Korean fund (350 million USD, financed by Korean brokers over the years) against systematic risk of collapsing brokers. There are no clients involved, so this probably won't be of any help.

Without a white knight, the firm is history. The losses are most likely bigger than their total equity of 19.8 billion KRW. Firm is (was..) privately held, so somebody must be having a really bad day. It has always been a bad idea to use a red tent as company logo.

Update

See also the Korea Times on the matter, especially for the numbers. They have no clue about the difference between exercising options and executing trades. Anyway : 46 counterparties and 36.100 trades.

Update January 13

Optiver returned $600k trading profits to Hanmag Securities. Other firms returned money as well. At the same time, the exchange will introduce a “kill switch” in February. A mistrade regulation would be all they need, just copy paste a form of any other derivatives exchange. Five minutes work.

 

Jack
Jack