The erroneous stock dividend fiasco at Samsung Securities has raised serious doubts about the overall stock trading system and the short selling of stocks.
Financial authorities have begun inspecting the trading systems at local securities firms while a public petition has also been introduced calling for a ban on the short sale rule.
It all began when a worker at Samsung Securities made an error earlier this month.
Under an employee stock ownership plan, the brokerage planned to pay dividends of one-thousand won to its employees. But the staff member mistakenly issued one-thousand shares to them instead on April 6th.
Over two-point-eight billion shares were wrongly paid out as dividends.
To make matters worse, some five million of these shares were sold by 16 employees, resulting in a near 12 percent plunge in the company's share price. The plunge led to other shareholders unloading their stocks.
According to the Financial Supervisory Service, the nation's watchdog, the transaction was processed on April 5th but the official who gave the final approval did not notice the error.
The mistake was only discovered the next morning, when Samsung Securities requested its employees not to sell the shares.
The incident has led to widespread criticism, with questions raised about the firm’s late response. It took 37 minutes from the time of recognizing the error to the first measures being taken.
The incident has also raised concerns of the moral hazard on the part of the employees who quickly sold the shares they wrongly received to gain unjust profit.
There are 89.3 million shares of Samsung Securities while no more than 120 million can be issued. However, more than 2.8 billion "bogus shares" were traded in the latest case.
The trading system failed to pick up this clear error.
Major loopholes are also found in the employee stock ownership plan. Cash dividends paid to members of corporate ownership plans are not required to go through the Korea Securities Depository.
The incident at Samsung Securities has also raised calls to abolish the short selling of stocks, with over 200-thousand people signing a related petition and therefore triggering a formal response from the presidential office.
A short sale is the sale of an asset such as a stock or bond that the seller does not own. The seller completes such a sale by borrowing the asset in order to deliver it to the buyer.
It is a trading strategy that capitalizes on an anticipated decline in the price of a security. Investors rely on this method for profit-taking.
Critics of short selling want it abolished, saying that side effects have been well exposed in the recent case.
However, Financial Services Commission chairman Choi Jong-ku has practically opposed the idea by saying that the Samsung blunder would have happened all the same even if short selling was banned.