Authorities should investigate into Morgan Stanley’s alleged front running

A negative report released by Morgan Stanley last week drove down stock prices of Samsung Electronics and SK hynix Semiconductor. The impact was so large that the Korean stock market did not even benefit from the US Federal Reserve lowering its benchmark interest rate by 0.5%. There is even controversy that Morgan Stanley’s bulk sell orders for SK hynix two days before the report was released was based on front running.

In a report titled “Winter Looms,” issued on Sept. 15, Morgan Stanley sharply lowered the target stock price for SK hynix from 260,000 won to 120,000 won and for Samsung Electronics from 105,000 won to 76,000 won. It was a completely different outlook from the one it had issued just three months ago, citing sluggish demand for general-purpose DRAM and the possibility of an oversupply of high-bandwidth memory (HBM). On the first day of trading after the Chuseok holiday, SK hynix plummeted 6.14%, and Samsung Electronics plummeted 2.02%, removing market capitalization by more than 15 trillion won.

The recent rise in DRAM semiconductor prices has indeed slowed. However, Korea-manufactured high value-added HBM used in Nvidia's AI chipsets, etc., has already been completely sold out of the production volume scheduled for next year, which is why some experts are pointing out that the pessimistic outlook in the report is exaggerated. Morgan Stanley previously lowered the outlook of Korean semiconductor companies in the past. Still, its negative outlook in 2017 turned out to be completely off as Samsung Electronics posted its best performance ever that year and the following year.

The Financial Supervisory Service and the Korea Exchange are closely examining the fact that Morgan Stanley’s Seoul branch concluded a sell order for 1,011,719 SK hynix shares on Sept. 13. When securities firms, etc., release research and analysis data on specific financial products, they are prohibited from trading relevant products from their accounts from the time they finalize the content to 24 hours after the release is made. If any portion of Morgan Stanley’s funds were included in the trading contract concluded before the report was released, it would be considered front running and hence illegal.

Due to concerns over a possible economic slowdown in the U.S. and China and the impact of the Morgan Stanley report, the market cap of Samsung Electronics and SK hynix has dropped by 117 trillion won over the past month. The proportion of foreign investors in the Korean stock market is 33%, the lowest in seven months. On the other hand, the US stock market, which lowered interest rates due to concerns about an economic downturn, is on the rise. It will be difficult to implement the value-up (increase in corporate value) of the Korean stock market by allowing groundless reports to influence it. It is crucial that unsound behaviors disrupting the stock market be thoroughly investigated and punished.