A major Chinese securities firm, which was the sole mainland Chinese broker engaged in market-making activities for South Korean investment exchange-traded funds (ETFs), has suspended its related operations.

This measure comes as the Chinese government steps in to stabilize the capital market and protect retail investors amid growing volatility in the South Korean stock market.

According to the South China Morning Post, China Merchants Securities announced in a filing with the Shanghai Stock Exchange that it has ceased its role as a liquidity provider for the "Huatai-PineBridge CSOP South Korea Semiconductor ETF."

This halt comes just one month after it took on the role on June 17.

The withdrawal took place amid recent extreme volatility in the South Korean stock market.

Li Yiming, senior manager research analyst at Morningstar, analyzed that "time differences and foreign exchange risks in cross-border arbitrage have exposed market makers to sharp price fluctuations and liquidity constraints."

Yesterday afternoon, the South Korean investment ETF came close to its daily upper limit of a 10% gain in China.

Trading volume hit a record high of 23 billion yuan, approximately 5 trillion won, and the Shanghai Stock Exchange has suspended morning trading at least 55 times this year to prevent overheating.

Huatai-PineBridge, the asset manager, has also issued more than 100 risk warnings.

Analyst Li pointed out that a reduction in active market makers could increase the volatility of the ETF's premium and discount relative to its net asset value.

China Merchants Securities also suspended its market-making operations for five Qualified Domestic Institutional Investor (QDII) products linked to the Japanese Nikkei 225 and U.S. Nasdaq 100 indices.

QDII is a system that allows approved institutions to invest overseas within limits set by regulatory authorities.

In South Korea, the KOSPI index surged 116% from around 4,224 at the beginning of this year to an all-time high of 9,385.59 on June 19.

Subsequently, it plummeted by more than 28% to 6,516.27 on the 20th of last month, during which circuit breakers were triggered 8 times and sidecars 37 times.

The KOSPI has been repeating sharp fluctuations day after day, with the average daily fluctuation range exceeding 400 points since last May, showing even worse volatility than the U.S. Nasdaq.

In particular, on June 23, it swung by nearly 1,000 points in a single day, recording the largest daily fluctuation range in history.

It was analyzed that the volatility was further amplified by the launch of single-stock leverage products for Samsung Electronics and SK Hynix.

Reported by Kim Minjeong | Video by Kim Bok-hyung | Graphics by Lee Jung-joo | Produced by SBS Digital News