Morgan Stanley is under investigation by the Korea Exchange for allegedly selling a significant amount of SK Hynix shares just before releasing a report that drastically lowered the company’s target stock price, raising suspicions of front running.
On Sept. 20, a Korea Exchange official announced that the agency had begun analyzing trading accounts linked to large sell orders placed prior to the SK Hynix report’s release. The official noted that the analysis would take time, and if any irregularities are found, the case would be forwarded to the Financial Supervisory Service.
According to the Korea Exchange, Morgan Stanley’s Seoul branch executed the largest volume of sell orders for SK Hynix shares on Sept. 13, the last trading day before the Chuseok holiday. On that day, Morgan Stanley sold over 1 million shares of SK Hynix, significantly outpacing JP Morgan, which sold 500,000 shares, accounting for about 20% of the total sell volume.
Two days into the Chuseok holiday, on Sept. 15, Morgan Stanley released a report titled “Winter Looms,” slashing its target stock price for SK Hynix from 260,000 won to 120,000 won. The report cited declining demand for DRAM memory and concerns about oversupply of high-bandwidth memory (HBM). It also downgraded its investment recommendation from “overweight” to “underweight,” effectively urging investors to sell.
The sell recommendation from Morgan Stanley became evident in the domestic market when trading resumed on Sept. 19. On that day, SK Hynix shares faced aggressive selling pressure from foreign brokerages, resulting in over 2.4 million shares sold. Rumors circulated that a Hong Kong-based private equity fund was targeting South Korean semiconductor companies, including SK Hynix and Samsung Electronics, further fueling the panic.
Despite efforts by institutional and retail investors to stabilize the stock, SK Hynix shares plummeted by as much as 11% during trading, eventually closing at 152,800 won, a decline of 6.1% (1,000 won) from the previous day. On Sept. 20, buoyed by positive news from the U.S. semiconductor market, SK Hynix’s stock rose by 2.8%, but it remained below its pre-holiday price of 162,800 won, closing at 157,100 won.
Industry observers have noted that the sale of over 1 million shares in a single day from one brokerage is unusual. Based on the closing price on Sept. 13, the sales through Morgan Stanley amounted to approximately 164.7 billion won. Given the 10,000 won drop in share price on Sept. 19, the brokerage could have avoided around 10.1 billion won in losses by selling 1 million shares before the drop, which has led to allegations of front running. This practice, involving the use of non-public information for illegal profits, is prohibited under capital market laws.
While the timing and scale of the sell orders raise questions, some in the securities industry caution against definitively labeling it as front running. A former compliance officer from a domestic brokerage pointed out that even if sell orders were executed through Morgan Stanley’s Seoul branch, the actual investors could be foreign institutional investors holding accounts with the firm. Another foreign brokerage official noted that foreign firms are subject to strict regulations from both South Korean authorities and the U.S. Securities and Exchange Commission (SEC), making it challenging to engage in illegal trades without facing severe consequences.
The Korea Exchange has acknowledged that large-scale sell orders from a single brokerage in one day are rare but is approaching the investigation with caution. A spokesperson stated, “If concerns are raised in the market, we typically conduct a review,” adding that any findings would be dealt with rigorously.
