Korea Exchange launches high-frequency trading survey, signaling tighter regulation after KOSPI plummet

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The South Korean stock market has recently experienced intense volatility. After extreme fluctuations in the benchmark index, with plunges and sharp rebounds, the Korea Exchange (KRX) is assessing the actual impact of high-frequency trading (HFT) on the market, signaling potential regulatory tightening.

Today, the Korean market saw a strong rebound, with the Seoul Composite Index (KOSPI) surging 3.6% at the close, ending at 6747.95 points. The semiconductor sector was the main driver of the rally, with heavyweight Samsung Electronics' shares soaring 6%.

Due to excessive intraday gains, the Korea Exchange activated the Sidecar (circuit breaker) mechanism today, temporarily suspending programmatic buy orders for the KOSPI. This intervention highlights the extreme volatility in the current market and further confirms regulators’ concerns about computerized trading exacerbating market turbulence.

Before this strong rebound, the KOSPI index—after hitting a high of 9000 points this year—plunged 23% in just 13 trading days this month. Facing persistent and intensifying volatility, the Korea Exchange has initiated a special research tender to assess the impact of high-frequency trading, aiming to evaluate its true effects on the market and prepare regulatory improvements.

Tax Cuts and High Volatility Boost Trading Volume

High-frequency trading (also known as ultra-fast trading) relies on computer algorithms to place orders at extremely high speeds. Unlike conventional program trading—which executes large orders automatically under certain conditions—high-frequency trading intensively places orders in fractions of a second without human intervention. Foreign institutional investors account for a significant portion in this field, with strategies focused on arbitraging fleeting price differences.

The profitability of high-frequency trading is closely linked to trading costs, and its potential returns increase as securities transaction tax rates drop. Since South Korea lowered securities transaction taxes in 2019, concerns about the possible disruptive effects of surging high-frequency trading have persisted.

Recently, with rising overall trading volume and wild index swings in the Korean stock market, the scale of high-frequency trading has further expanded. When market volatility stays elevated and many buyers seek instant execution, the activity level of high-frequency trading typically climbs sharply.

Research Covers Derivatives and Cross-Market Arbitrage

According to the Korea Exchange and related agencies, bids for the high-frequency trading research project will close on the 27th of this month, and the study is scheduled for completion in the second half of the year.

Besides conventional individual stock trading, the exchange’s assessment will deeply cover derivatives and cross-market areas. The research will analyze high-frequency trading using leveraged ETFs or derivatives for spot-futures correlation, and will also focus on evaluating the scale and impact of high-frequency arbitrage between the Korea Exchange and NEXTRADE (NXT) on the stock market. In the Korean market, high-frequency trading is not limited to individual stocks and is also applied to ETF products.

After the completion of this research, the Korea Exchange intends to lay the foundation for a more robust regulatory framework. Currently, risk control mechanisms are already in place in the Korean market, including the registration system for high-speed algorithmic traders introduced in 2023 and the "kill switch" (bulk order cancellation system).

Regarding regulatory concerns, an exchange official explained that when market conditions are unfavorable, there are widespread worries that high-frequency traders may negatively impact the market, as seen in the US "flash crash" that lacked obvious causes. The official stated that the core purpose of this research is to identify the actual effect of high-frequency trading on Korea’s market.

However, high-frequency trading is not purely a market disruptor. Kang So-hyun, Senior Researcher at the Capital Market Research Institute, noted that entities participating in high-frequency trading also act as market makers; when bid-ask spreads widen, they can effectively narrow the gap and provide necessary liquidity to the market.

Risk Disclaimer and TermsThe market bears risks; investment requires caution. This article does not constitute personal investment advice and does not take into account any individual user's unique investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their specific circumstances. Investing on this basis is at your own risk. ```