Static volatility interruption to take effect Sept. 14; both static and dynamic triggers to shift to call auction for 2 minutes

The headquarters of Nextrade in Yeouido, Seoul. [Yonhap]
The headquarters of Nextrade in Yeouido, Seoul. [Yonhap]

Nextrade, South Korea's first alternative trading system, said Monday it will introduce a static volatility interruption (VI) mechanism and a call auction system after SK hynix shares twice hit the daily lower limit at the open of pre-market trading within roughly a week.

Nextrade said it has revised its operating rules to introduce a static VI and to switch the order-matching method to a call auction whenever either a static or dynamic VI is triggered, with the changes taking effect Sept. 14.

Under the current system, opening prices during Nextrade's pre-market session — which runs from 8 a.m. to 8:50 a.m. — are determined through continuous auction rather than the call auction used in the regular market.

That structure has drawn criticism for leaving the exchange vulnerable to "fat finger" errors — order mistakes caused by human error — and market manipulation, since even a small erroneous order can cause the opening price to swing sharply.

Starting Sept. 14, Nextrade will apply the new static VI: if a stock's price moves more than 10 percent from the price set in the most recent call auction or from the reference price, the exchange will collect bids for two minutes and determine the price through a call auction.

The dynamic VI, which activates when a stock swings sharply against its most recent execution price during the trading session, will also be upgraded. Rather than simply halting trading for two minutes as before, the exchange will collect bids during that two-minute window and conduct a call auction.

"If the first price in the pre-market rises or falls more than 10 percent from the previous day's closing price — the reference price — it will not be executed immediately," a Nextrade official said. "Instead, bids will be collected for two minutes and the price will be set through a call auction. This is expected to prevent a situation where the first pre-market price is set at the upper or lower limit due to a small-volume order."

Nextrade also said that when trading resumes after a market-wide halt — such as a circuit breaker — or after a trading suspension on an individual stock, it will collect bids for 30 seconds from the moment the Korea Exchange's call-auction bid acceptance period ends and then determine the price through a call auction.

The measures come after SK hynix opened at the daily lower limit in Nextrade's pre-market on two separate occasions roughly a week apart.

On Aug. 6, SK hynix shares traded at 1.17 million won ($849) in the pre-market immediately after the open — 29.98 percent below the previous regular-session closing price.

Only 11 shares changed hands, but because Nextrade determines its opening price through continuous auction rather than a call auction, that single transaction set the opening price.

A dynamic VI was triggered immediately, and after a two-minute call auction the decline narrowed to around 3 percent — but investor confidence took a hit.

Earlier, on July 28, a single share of SK hynix had traded at the daily lower limit of 1.27 million won in the pre-market immediately after the open.

"We will work to reduce market volatility so that Nextrade can become a trusted market worthy of its quantitative growth," the Nextrade official added.

Nextrade launched in March last year as South Korea's first alternative trading system. After posting an operating loss in the first half of last year, it swung to an operating profit of 89.72 billion won in the first half of this year, reflecting rapid growth.

Also Monday, Goldman Sachs Securities Seoul Branch and CLSA Korea Securities joined Nextrade as new members, bringing the total membership to 38 domestic and foreign brokerages. The number of foreign securities firms on the platform rose to five, including existing members Macquarie Securities, Morgan Stanley Securities and Merrill Lynch Securities.


jiyun@heraldcorp.com