SK Hynix is placed on investment warning... Will regulatory scrutiny of large caps shake the stock market?

With the sharp rise in South Korea’s Kospi Composite Index this year, large-cap stocks with high market capitalization, led by SK Hynix, have been successively designated as investment warning items. The inclusion of major large-cap stocks (rather than small- and medium-sized thematic stocks) on the warning list is considered unusual.

According to the Korea Exchange, as of December 11, SK Hynix and SK Square have been designated as investment warning items. The stock prices of both companies have increased by 244% and 314% respectively over the past year. Factors such as reaching the highest closing prices within the recent 15 trading days contributed to the basis for the warning designation. An investment warning is an intermediate stage in the market warning system, applied when concerns arise about unfair trading practices such as rapid stock price surges or large-volume trades by a few accounts.

This designation is not merely a warning. Once classified as an investment warning item, credit financing purchases will be restricted, and if the stock price continues to surge afterwards, trading suspension measures may be implemented. If designated as a “Investment Risk” stock at the highest alert level, trading will be completely halted for the entire day. This measure aims to maintain market integrity but can sometimes cause confusion and inconvenience for individual investors.

In practice, after the warning was announced, the stock prices of SK Hynix and SK Square fell by 3.75% and 5.09% respectively from the previous day, showing weakness. Meanwhile, despite positive signals from the US benchmark interest rate cut news and a 0.64% rise in the KOSPI index, stocks designated as warning items were overshadowed amid the rising market. This indicates that the warning designation has played a role in tempering investor sentiment.

Since the beginning of this year, the total number of investment warning items has reached 72, exceeding the total for the entire previous year (44 cases). The number of “Investment Risk” designations, the strictest level in the market warning system, has also reached 7, which is seven times higher than last year. Previously, the designated stocks mainly included small- and medium-sized tech or thematic stocks with speculative tendencies, but this year, many top-tier stocks by market cap have been included, attracting more attention.

Some investors have expressed dissatisfaction with this trend. The Korea Stock Investors Union questioned whether even super-large stocks are being regulated and pointed out fairness issues in the system, noting that warnings are only issued for rising stocks while there are no corresponding measures for falling stocks. There are opinions that the exchange’s warning system should be re-evaluated to see if it truly fits the current market environment.

Concerns have been raised that if this large-cap-centered investment warning designation continues, it could not only lead to short-term stock price adjustments but also suppress overall market investor sentiment. However, as a measure to curb excessive price surges and create a more stable investment environment, it may help maintain market health in the long run. How this trend will be affected by the future overheating of the market and the direction of regulatory policies by the exchanges remains to be seen.