South Korea's stock market has recently experienced severe volatility. Following extreme swings where the benchmark index plummeted and then surged sharply, the Korea Exchange (KRX) is now moving to assess the actual impact of high-frequency trading (HFT) on the market, signaling a potential tightening of regulations.
Today, the market staged a powerful rebound, with the KOSPI index closing up 3.6% at 6,747.95 points. The semiconductor sector was the primary driver of this recovery, with heavyweight Samsung Electronics seeing its stock price surge by 6%.
Due to the excessive intraday rally, the Korea Exchange activated its Sidecar (circuit breaker) mechanism today, temporarily halting programmatic buy orders for the KOSPI. This intervention underscores the current state of extreme market volatility and further highlights regulatory concerns that automated computer-driven trading may be exacerbating market swings.
Prior to this strong rebound, the KOSPI index had plunged 23% in just 13 trading days this month after hitting a high of 9,000 points earlier this year. In response to the persistently heightened market volatility, the Korea Exchange has initiated a specialized research tender to study the market impact of high-frequency trading. The aim is to evaluate its true effect on the market and prepare potential regulatory improvements.
Tax Cuts and High Volatility Fuel Trading Volume
High-frequency trading, also known as ultra-fast trading, relies on computer algorithms to execute orders at extremely high speeds. Unlike conventional program trading, which automatically executes large orders under specific conditions, HFT involves placing a high density of orders in time gaps of less than a second without human intervention. Foreign institutional investors hold a significant share in this field, with strategies primarily focused on arbitrage to capture fleeting price discrepancies.
The profitability of HFT is closely tied to transaction costs, and its profit potential increases as securities transaction tax rates fall. Since South Korea lowered its securities transaction tax in 2019, concerns have persisted that a surge in HFT could disrupt the market.
Recently, as overall trading volume in the Korean stock market has risen alongside sharp index fluctuations, the scale of HFT has expanded further. In an environment where market volatility remains high and many buyers seek immediate execution, HFT activity tends to increase significantly.
Research to Cover Derivatives and Cross-Market Arbitrage
According to the Korea Exchange and related institutions, the application period for this HFT research project tender will close on the 27th of this month, with the study planned for completion in the second half of the year.
Beyond regular stock trading, the exchange's evaluation will also deeply cover derivatives and cross-market activities. The research will analyze HFT that leverages leveraged exchange-traded funds (ETFs) or derivatives for futures-spot arbitrage. It will also specifically assess the scale and market impact of high-frequency arbitrage activities between the Korea Exchange and Nextpower (NXT). In the Korean stock market, HFT is not limited to individual stocks but is also applied to ETF products.
The Korea Exchange plans to use the findings from this research to lay the groundwork for building a more robust regulatory framework. Currently, the Korean market already has some risk control mechanisms in place, including a registration system for high-speed algorithmic traders introduced in 2023 and a "kill switch" (a system for canceling large batches of orders).
Regarding the current regulatory considerations, an exchange official explained that during poor market conditions, there is widespread concern that HFT participants could negatively impact the market, similar to the "flash crash" that occurred in the US without an obvious cause. The official stated that the core purpose of this research is to determine the actual impact of HFT on the Korean market.
However, high-frequency trading is not purely a market disruptor. Kang So-hyun, a senior researcher at the Capital Market Research Institute, pointed out that market participants engaged in HFT also play the role of market makers. When bid-ask spreads in the market widen, they can effectively bridge this gap, providing necessary liquidity to the market.
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