GL Entech (9)

Once the bill passed, the business world went into emergency mode. Nearly every conglomerate had to rip up its future listing and investment plans and start over from scratch.

At the Federation of Korean Industries meeting, the grievances of the business world finally spilled over.

"What kind of law is this, for heaven’s sake?"

"If this is how it’s going to be, how are we supposed to run our companies from here on ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠out?"

"How are we supposed to keep investing in Korea like this?"

"The top ten chaebols have already had their fill, so at least they can live with it. But what about companies like ours that are only just getting started?"

"No, GL Group caused the mess, so why should we be the ones taking the hit?"

"We can’t even do what we want with our own companies anymore!"

The chaebols preferred not to patiently grow a single business into something solid; they liked expanding endlessly, like octopus tentacles spreading into every corner they could reach. And, naturally, they preferred doing it with other people’s money rather than their own.

If that ended in failure, so be it. If it succeeded, then from that point on they’d have to share the profits with the shareholders.

From the chaebols’ point of view, that was intolerable.

What, exactly, had the shareholders done to deserve a cut of the profits?

Chairman Joo Minsoo, who led the Federation, raised both hands to calm the room.

"All right, everyone, settle down. The law has already passed, so what choice do we have? What matters now is how we respond."

At that, everyone put on serious faces and began talking through countermeasures.

For years, new laws had been passed to rein in the chaebols.

But every time, the conglomerates had found a way around them.

When it became illegal to funnel contracts to the chairman’s children’s companies, they traded work back and forth between one another’s children’s companies like some grotesque neighborhood exchange.

When affiliates with ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠a controlling family’s stake of 20 percent or more were targeted by regulation, they sold shares to paper companies and trimmed their holdings to 19.9 percent to slip past the line.

This time would be no different.

They would find the answer.

They always did.

The question of who was responsible for this mess became the biggest political controversy of all.

The government first tried to shove the blame onto GL Group, and CEO Go Jaeik even issued a public apology. But the government itself wasn’t going to escape unscathed either.

The real issue was naked short selling.

The problems with short selling surged back to the surface, and individual investors made no effort to hide their anger and distrust.

In fact, a public petition was even posted on the Blue House website calling for punishment of firms engaged in naked short selling.

The financial regulators broke out in a cold sweat.

Up until then, the government’s position had been that naked short selling was impossible and that real-time short-selling monitoring was not feasible.

Instead, they had said they would strengthen post-fact detection systems and severely punish any illegal short-selling that was caught.

But this incident had exposed just how badly short-selling oversight had been botched.

Only now it wasn’t one or two firms involved, but the majority of securities companies. There was no way they could punish all of them.

And if they simply let it go, they would effectively be giving naked short selling a pass.

Stuck between those two impossible choices, GL Entech’s stock kept climbing and climbing.

The GL Entech explosion wasn’t just a Korean story; it was news around the world.

Not only internet outlets like WST, but also the New ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠York Times and the Wall Street Journal covered it closely.

As expected, articles comparing it to Volkswagen’s 2008 squeeze began flooding in, and investors around the world made Korea a laughingstock.

Confidence in the Korean stock market collapsed, and global capital fled just as quickly. Foreign investors sold a staggering ₩30 trillion after the incident and led the charge in the so-called Sell Korea trade.

Aside from a handful of stocks that had positive catalysts such as canceled physical spin-offs, most of the big-cap names fell. But thanks to GL Entech’s ascent, the index itself kept rising day after day.

Come to think of it, it was almost absurd.

GL Entech was the exact same company it had been a month ago. Its fundamental value hadn’t changed at all, and yet the stock price alone kept climbing.

I watched GL Entech’s price and trading volume with painstaking care.

Buying shares to push the price up wasn’t especially difficult.

The hard part was unloading the stock afterward.

The shares I bought to drive up the price would collapse the instant I sold them. That was why operators always started spreading all sorts of nonsense the moment they were ready to exit.

They’d say cobalt had been discovered in a mine, or that they’d signed a supply contract with a major conglomerate, or that they’d invented a revolutionary technology that could turn water into oil.

Then they’d dump the shares at a premium on the people who came running in after hearing the rumors and slip out through the back door.

I called David.

"What are you going to do?"

"It’s time to wrap this up. The exit window will come before long."

Right now the short sellers and the securities firms were still clinging to each other to survive, but how long could that last?

The moment even a little panic hit the market, every one of them would start moving to save themselves.

"Understood. Then we should get ready."

President Jo Kyunghwi of KD Securities felt like his blood was drying up day by day.

"Damn it!"

The fury among individual investors over short selling was beyond anything he had imagined.

And the institution that had become the main target was KD Securities.

As the lead underwriter, KD Securities had been allocated the largest block of shares. That meant it had also taken the largest number of retail subscriptions, and it had the largest pool of shares available to lend for short selling.

Even if you added up the shares lent out by all the other securities firms, they still wouldn’t come close to KD Securities alone.

Once that fact became known, individual investors declared a boycott of KD Securities.

Most retail accounts were under ₩100 million.

There were plenty of accounts worth only a few hundred thousand or a few million won.

But if ants swarmed together, they could carry real weight.

Not only GL Entech shares, but every stock in their accounts and even the cash sitting in their CMA accounts was yanked out en masse, cutting customer balances by ₩1 trillion.

The individual investors’ association went so far as to file a complaint with the prosecution, accusing KD Securities of violating the Capital Markets Act and demanding it be punished for illegal short selling.

They bought whatever they could just to make their share inventory line up, but trading volume was so thin that prices shot up every time they bought, leaving them with far fewer shares than they’d hoped to secure.

Of GL Entech’s 9.6 percent floating supply, Continue Capital held 5.5 percent.

Passive funds and institutions that had bought shares for hedging probably held another 3 percent. That meant the actual shares circulating in the market were barely over 1 percent.

Meanwhile, the short interest stood at 1.7 percent.

Even that had originally been over 2 percent, but as the stock price exploded and some hedge funds rushed to cover, the figure had come down a little.

KD Securities accounted for 0.9 percent of that amount.

At this point, they could barely hope to buy back all the shares actually trading in the market.

Not only had the shares they held already fallen below the shares they had lent out, they barely had anything left to lend at all. If this kept up, there could come a day when an individual investor tried to sell and the system simply had no shares to deliver.

There was another problem as well: options.

No one could know where the stock would go next.

That was why, as long as the stock stayed within a certain band, the option writer was guaranteed to profit whether the price rose or fell. That was the logic of the structure.

But once something unexpected happened and the price broke out of that band, the story changed completely.

Calls on the KOSPI 200 as the underlying asset were skyrocketing, while puts were collapsing. If expiration arrived like this, there was no way to estimate the losses.

The real question was what Continue Capital was thinking.

Head of the division Park Hyeondong reported in a tense voice.

"I think Continue Capital is starting to buy KOSPI 200 futures!"

"What?"

Were they trying to build a massive long position ahead of options expiration?

President Jo Kyunghwi thought it through coldly.

In the end, if Continue Capital moved to sell, the stock would crash.

Were they trying to squeeze out as much profit as possible with futures first, then switch to selling afterward?

At the moment, the KOSPI 200 index could basically be pushed up or down at Continue Capital’s whim.

What if Continue Capital decided to force the price higher before expiration?

Just two days of limit-up moves would send the stock up 70 percent. Three straight limit-ups would push it up 120 percent.

Cold sweat trickled down his back.

If they failed to prepare properly, the situation could spiral beyond control.

When a market anomaly appeared, the option writer would incur losses they had never anticipated.

When a particular option was expected to generate heavy losses, the best hedge was either to buy back the option they had issued at market price or purchase a similar option as closely as possible.

President Jo Kyunghwi issued his order.

"Buy back the call options we issued. If that’s not possible, buy similar options. And demand additional margin and repayment from the institutions that borrowed our shares."

If a short squeeze broke out, the stock might well go through the roof—but KD Securities could not be left to shoulder the losses alone.

Once rumors spread that Continue Capital would push up GL Entech’s price ahead of options expiration, institutions started buying call options by the handful.

Demand surged, the futures market spiked, and a contango emerged, with futures prices rising above spot.

Then news broke that the securities firms had demanded additional margin and repayment from the hedge funds that had borrowed shares.

As fears grew that a short squeeze might break out, GL Entech shot higher, which in turn shoved the futures market even further upward.

No one thought the current price was normal.

But someone had to buy the stock at that price anyway. Add in the speculators looking to make a killing, and both the stock price and trading volume soared together.

As institutional buying hit an all-time high, GL Entech finally pushed past ₩800,000 and came within striking distance of Yuseong Electronics’ market cap.

Everyone watched with growing anticipation, wondering just how far the stock could possibly go, when a shocking piece of news hijacked the entire market.

The moment the disclosure hit.

With the uncanny feeling that time itself had stopped, GL Entech, which had surged to ₩860,000, dropped straight to its limit down price.

They say the higher the mountain, the deeper the valley, and the force of the fall was every bit as brutal as the climb had been.

The day’s trading range reached a staggering 46 percent.

Everyone watching was swallowed by fear.