GL Entech (4)
The next day.
As soon as the market opened, GL Entech shot straight to its upper limit.
The stock price hit 325,000 won, and its market capitalization swelled to 260 trillion won.
That alone proved the KD Securities report, which had claimed GL Entech would overtake DATL within a few years, was dead wrong.
It hadn’t even taken a week for GL Entech to surpass DATL.
It wasn’t some company worth a few hundred million dollars. A firm valued at 200 trillion won had hit the upper limit.
Thanks to that, its market cap jumped by 60 trillion won in an instant, and even the KOSPI rose sharply despite the rest of the market barely moving at all.
* * *
GL Entech had been dogged by criticism that it was overpriced from the moment of its IPO.
After listing, people had even worried the stock might fall below the offering price. Yet now, a month later, the situation had turned completely upside down.
The price had climbed to more than three times the IPO level.
But no one believed that price was justified.
With the second-largest company on the KOSPI hitting the upper limit, securities firms were thrown into emergency mode.
A rising stock is usually good for everyone.
This time, though, it was different.
That was because the price wasn’t rising on fundamentals, but purely on supply and demand.
Which meant that if the imbalance were ever resolved, the stock could collapse.
GL Entech’s rise was affecting not just the cash market but the futures market as well. If it crashed, the shock would be even greater than the one that had accompanied the climb.
The securities firms felt as if they were sitting on a time bomb.
KD Securities, which had underwritten the listing, was especially on edge because it held the most GL Entech shares of any of them.
President Jo Gyeong-hwi asked, “Any chance the passive funds will come in for more buying?”
Head of division Park Hyeon-dong shook his head.
“Not at this price. But they won’t be able to sell what they already hold, either.”
If they sold after the stock had already risen and it kept climbing, the consequences would be impossible to manage.
“And the short sellers?”
“As long as they’re convinced the price will come back down, they won’t rush to cover. If they start covering now, the losses would be enormous.”
“Right.”
“The real problem is Continue Capital.”
They were the ones who had tangled the supply-and-demand dynamics in the first place.
“Lockhart said he’d buy another 3 percent. Is he really going to do it?”
Continue Capital had already poured roughly 8 trillion won into the move.
For most private-equity firms, that kind of money would have bent their backs. For Continue Capital, though, it probably wasn’t much of a burden.
After all, it had likely been made from shorting GL Chemical.
Seen one way, they had bought the stock without spending a single won of their own money.
“He probably just said it to rattle people. To buy another 3 percent from here, they’d need to throw in 30 trillion and it still might not be enough.”
Jo Gyeong-hwi thought the same thing.
Come to think of it, they probably don’t even need to buy more.
The trouble was that simply making people think they could buy more at any time was already having an effect.
Obviously that was the point of saying it.
Park Hyeon-dong said, “No matter how badly the supply-demand balance is distorted, there’s still a limit to how long a stock can keep rising. It’ll fall before long.”
President Jo let out a long sigh.
“So for now, we just watch?”
* * *
The heaviest shorting of GL Entech had been done in the 150,000 to 200,000 won range.
Once the stock climbed to 300,000 won, most short sellers were sitting on losses of more than 50 percent, and some had losses exceeding 100 percent, triggering margin calls for additional collateral.
Closing their positions now would mean absorbing losses they simply couldn’t afford. So everyone chose to hold on and wait.
JKH Partners was no different.
This Korean private-equity firm had made a fortune through short selling over the years. In particular, it had ridden the trades led by Continue Capital in LD Studio Headquarters and GL Chemical and struck gold.
So when it saw that GL Entech looked overvalued yet again, it piled into short positions all over again.
But then…
The stock suddenly surged, and it was now in danger of wiping out all their investment capital.
CEO Kwon Dong-ju was shocked.
No, why is Continue Capital involved here?
They had just been shorting GL Chemical with gusto, then suddenly started buying GL Entech like mad. It was impossible to make sense of.
Even in his surprise, he forced himself to think calmly.
Are they trying to drive the price up by creating a supply problem?
Fortunately, in the Korean market, institutions didn’t face a fixed deadline for short-covering. As long as they paid transaction costs and posted margin, they could keep extending their positions indefinitely.
If we wait, the price will return to where it belongs. We just need to wait a little longer.
The market opened again.
Everyone’s eyes were on GL Entech.
Whether it would hit the upper limit again was the question on everyone’s mind, but early in the session the stock, which had been up 3 percent, quickly dropped more than 10 percent and fell back below 300,000 won.
As expected, the price pressure had simply been too severe.
The analysts who had once been desperate to push the stock higher were now, as if nothing had happened, fanning the flames of its decline.
It seemed to work, because the losses kept widening, and Kwon Dong-ju let out a relieved breath.
Exactly. No need to rush into buying.
* * *
“...That’s what they’ll be thinking.”
At my words, Senior Dong-ho nodded.
“Probably. Once the institutional lockup expires, the price should fall somewhat anyway.”
From the short sellers’ perspective, the future price was already written, so there was no need to cover immediately.
In the end, if we wanted to keep the price propped up, Continue Capital would have to buy more, and that came with its own burden.
“That’s why I’m going to force a short squeeze.”
“How?”
“You’ll see.”
“No, can’t you at least tell me in advance?”
“No.”
“Why not?”
“Because then it wouldn’t be fun.”
“……”
I called Syd after a long time.
“Is the thing we talked about back then going well?”
[Yes. It isn’t even that difficult. We can make it work just by modifying the existing program.]
That was partly because Syd was a genius, but mostly because it really was a simple task.
The strange thing was that Korea hadn’t been doing something that easy until now.
[When are you coming to the U.S.?]
“I’ll go after this is over.”
[Understood.]
* * *
(Strategic report) The three securities firms announced that they would computerize short selling in cooperation with Snow Crash, the well-known American cloud company.
They also stated that, except where a separate agreement had been signed, they would never use shares purchased by individual investors for short selling.
In effect, this amounted to an admission that securities firms had been implicitly using retail investors’ shares for short selling all along.
In truth, the short-selling system had always been a highly sensitive issue for individual investors.
Whatever the need for it, institutions and foreign investors could use it freely, while individual investors were effectively unable to do so.
In a falling market, institutions and foreign investors could flood the market with short sales, while individual investors had no choice but to watch.
That was one reason the Korean market was called a tilted playing field.
For years, individual investors had consistently demanded either the abolition of short selling altogether or the right to do it themselves, but the financial authorities had given various reasons for refusing.
(omitted)
...Because of this lack of transparency, there had long been suspicions that securities firms might be using retail investors’ shares for short selling without permission, or that naked short selling might be taking place.
The best way to dispel such suspicions was to computerize short selling, just as stock trading had already been computerized.
Calls to computerize short selling had been constant, but both the Financial Services Commission and the securities firms had brushed off individual investors’ demands with one excuse after another.
They claimed there was a high risk of side effects such as trade delays and input errors, that building the system would cost an astronomical amount of money, that vigilant monitoring was enough, that they would strengthen criminal penalties, and so on.
In effect, the financial authorities and the securities firms insisted it was impossible, but Snow Crash said something entirely different.
A spokesperson for Snow Crash explained that building such a system was not difficult at all.
“Almost every country has computerized short selling. Yet Korea, unbelievably, still handles it manually. That creates all kinds of order-entry mistakes, and even if naked short selling occurs, there’s no reliable way to catch it. But the program developed by Snow Crash can execute securities lending quickly and accurately by transmitting it in expert form to the Korea Securities Depository’s intermediary system. Technically, this is a very easy task.”
DA Securities President Ahn Ho-jung explained why his firm was moving ahead with computerization.
“Together with Yuseong Securities and Hwan Securities, DA Securities will become the first in Korea to computerize the entire securities lending process, securing both the stability and transparency of trading while improving operational efficiency. This will eliminate order-entry mistakes at the source, and processes that used to be handled by messenger or email can now be completed in just a few clicks, enabling much faster trading. Greater transparency in transactions will also remove investors’ anxiety and suspicion, and it will make short selling available to individual investors as well. Although short selling is a necessary market function, individual access has long been restricted, drawing criticism that the market is tilted. Our three firms will first sign a business agreement and begin individual investor short-selling transactions, then expand cooperation to other securities firms as well.”
* * *
After reading the article, KD Securities President Jo Gyeong-hwi was aghast.
“What the hell are these lunatics doing?”
Why bring up the short-selling issue at this exact moment?
This couldn’t be a coincidence.
“N-no way... did they join forces with Continue Capital?”
It was no longer a suspicion but a certainty. Of all things, the company building the short-selling computerization system was Snow Crash.
DA Securities and Hwan Securities were only midsized firms, so their influence wasn’t major. But Yuseong Securities being involved changed everything.
Jo Gyeong-hwi quickly called Yuseong Securities President Jeong Nam-cheol.
“What exactly is going on?”
[What do you mean?]
“Why did you suddenly announce short-selling computerization?”
[Ah! You know that, a while back, our company mistyped a 1,000-won dividend as 1,000 shares and basically ended up doing naked short selling by mistake, don’t you? Since then, we’ve been thinking hard about how to solve the problem, and we concluded that computerization was the only answer.]
“What? N-no, but that was years ago...”
It was absurd beyond belief.
At the time, demands for short-selling computerization had poured in, but Yuseong Securities had brushed them off with a vague promise to be more careful in the future.
And now they’re suddenly using that as an excuse to computerize it?
[I was just about to contact you, President Jo, so this works out nicely. How would KD Securities feel about joining the computerization effort? We’re also talking with the other securities firms.]
“……”