The Korea Exchange (KRX) analyzed the effects of the market reforms implemented from early this year according to “KRX Advancement Promotion Strategy” announced in January 2014 in order to vitalize the stock market. The analysis target includes the expansion of price limit in off-hours markets, introduction of volatility interruption to individual issues and reduction of trading unit to a single share in the KOSPI market. The period observed for the analysis is three months both before and after the reforms.
In summary, the stock market reforms have contributed to the recovery of the stock market by improving liquidity and enhancing investor convenience. Especially, information efficiency has led to a substantial increase in off-hours trading volume, and the volatility interruption reduced the volatility of low liquidity issues, thereby improving market environment significantly. The reduction of trading unit to a single share has contributed to an increase in the number of individual investors who tend to hold lots of low price shares and liquidity in the Exchange market as well and consequently improved investor convenience.
<Expansion of price limit in off-hours markets in both KOSPI and KOSDAQ markets>
The expanded price limit allows the stock market to better reflect information that affects price, therefore concentrating liquidity efficiently and enhancing the price discovery function of the market. The expansion of price limit has brought about improvements (e.g. a substantial increase in the trading volume) in the role played by the off-hours market which was regarded as being auxiliary to the regular market.
In addition, the reduction of transaction execution interval improved information efficiency and resulted in an increase in the number and size of orders and the number of executed trades. Lots of trades were executed at a price over the price limit of 5% compared to the market closing price.
<Introduction of Volatility Interruption in KOSPI and KOSDAQ markets>
The volatility interruption has reduced the volatility of low liquidity issues and mitigated abnormal changes of stock price, thus contributing to price stability and investor protection.
The daily average number that triggers the volatility interruption in both markets is similar at about 30 issues and 45 times per day. Most of the volatility interruption cases occurred in low liquidity stocks, and the trading method thereof was changed into single price auction for two minutes.
* In the KOSPI market, issues with the average daily trading volume being less than 360,000 shares took up 84% of the total number of issues that triggered the volatility interruption. In the KOSDAQ market, issues with the average daily trading volume being less than 500,000 shares took up 82% of the total number of issues that triggered the volatility interruption.
In both markets, the volatility interruption reduced the volatility for about 50% of the issues, and the rate of price change decreased 1.5%, thus contributing to price stability.
< Reduction of trading unit to a single share in the KOSPI market>
Since the introduction of a single-share trading, the number of bids/asks and the trading volume of stocks priced below KRW 50,000 increased. Specifically, the number of trading orders of low price issues in the regular market increased as much as 53%, and the number of trading orders for a single share also climbed as much as 63%. Single share trading, which is a departure from the former 10 share trading unit, is now a general form of practice.
With the permission of single share trading, the average daily number of investors surpassed 300,000, expanding investor base. Specifically, the number of individual investors’ accounts increased 30,000 or 10.4%, indicating that more individual investors who hold low price stocks have actively participated in the stock market.
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KRX: Analysis Of Effects Of The Stock Market Reform In 2014
Date 30/12/2014