Catching 'Algorithmic Trading' and Attracting Stock 'Jikgu-jok'... Activating Measures to Revitalize the Korean Stock Market

Korea Exchange Announces Comprehensive Plan to Revitalize KOSPI Market
Defines Algorithmic Trading Concept and Announces Formal Regulation
Expands High-Yield New Products to Attract Overseas Direct Buyers
Establishes Guidelines to Ensure ESG Disclosure Implementation

Im Jae-jun, Head of the Korea Exchange KOSPI Market Division (Vice President)

[Asia Economy Reporter Minwoo Lee] The 'algorithmic trading' (a method of automatically trading stocks based on market trends using computers), which had been placed in a 'lawless zone' due to the lack of a legal definition, will be formally incorporated into the regulatory framework. Various product developments aimed at attracting 'direct purchase' investors who buy overseas stocks directly to the domestic stock market are also expected to be encouraged.

On the 22nd, the Korea Exchange held a press conference in Yeouido, Yeongdeungpo-gu, Seoul, announcing the '2020 Key Plans for the Securities Market.' Jaejun Lim, Head of the Securities Market Division (Vice President) at the Korea Exchange, explained, "As we enter a full-fledged era of low interest rates and aging population, the traditional stock investor base is shrinking. Although the US stock market reached an all-time high last year and global markets were in a recovery phase, the KOSPI saw a decline in trading volume, so we have prepared these measures to revitalize the market this year."

◆ Formal Management of Algorithmic Trading Begins = Accordingly, management of algorithmic trading will commence. Algorithmic trading is a method where stock prices, quantities, times, and market conditions are pre-programmed into a computer to execute trades automatically. This leads to high-frequency trading (HFT), which rapidly repeats buy and sell orders. While it has become common in global markets due to advantages such as liquidity provision, reduced transaction costs, and improved price discovery, concerns over large-scale errors, system failures, and unfair price manipulation have prevented it from being formally defined in Korea. Due to the lack of a clear definition, it had been outside the regulatory scope of the exchange.

Seongchae Ra, Executive Director of the Securities Market Division at the Korea Exchange, stated, "With the rapid advancement of financial IT and the sophistication of investment strategies, algorithmic trading is likely to spread in our stock market. We plan to define the concept of algorithmic trading, including high-frequency trading, and impose pre-registration and system management obligations on algorithmic traders." He added, "We will also establish risk management measures at the exchange level to prepare for large-scale errors caused by system failures."

In addition, measures to expand market making to allow stock investors to trade quickly at low costs at their desired times, as well as initiatives to reduce the tick size in the domestic stock market, will be pursued to improve market infrastructure.

◆ Expansion of High-Yield New Products to Attract 'Direct Purchase' Investors = The plan also includes expanding new products to invigorate the market. First, incentives will be promoted to bring direct purchase investors, who invest directly in overseas stocks, back to the domestic stock market. As of December last year, the balance of foreign currency stock holdings by domestic investors was 16.8 trillion KRW, a 47% increase compared to the previous year. Executive Director Ra said, "We will continue to supply a variety of global investment products with diverse risk-return structures, such as overseas synthetic ETFs, overseas stock-type ETNs, and ETNs related to overseas stock indices and commodities (crude oil, natural gas, gold, etc.)." Additionally, products exceeding commercial bank interest rates will be continuously developed and supplied, and issuers will be allowed to issue their own indices.

Measures to protect users will also be established. To promote the issuance and investment of Socially Responsible Investment (SRI) bonds, a platform providing comprehensive related information will be built. Furthermore, a dedicated team will be set up to establish an Environmental, Social, and Governance (ESG) disclosure culture and provide guidelines. Other initiatives include ▲ rationalizing the delisting system for stock and bond markets ▲ restructuring the structured securities market such as ETNs and Equity-Linked Warrants (ELWs) according to product characteristics and risk levels ▲ promoting English disclosures.

The Korea Exchange plans to comprehensively implement these measures along with related government recommendations. However, the timing of the final comprehensive plan announcement is yet to be determined.

This content was produced with the assistance of AI translation services.