Widening of daily trading band in Korea ‘long overdue’

Brokers and buy-side firms have generally welcomed a move by Korea’s financial regulator to widen the price fluctuation band for daily stock trading, describing it as long overdue.
  
The Korean government this week unveiled plans to shift the trading band to allow it to fluctuate 30% up or down from the previous day’s close. The limit has been set at 15% for the past 16 years despite the market cap of the main Korea Exchange (KRX) having grown nine times since 1998 to stand at $1.2 trillion.

The move is intended to improve the market’s price discovery function. Industry players have long complained that the daily 15% limit inhibits the free buying and selling of shares and as such prevents appropriate prices being set via supply and demand.

In response, the government has opted to widen the trading band to 30%, effective from January 1 next year. It said it would spend the next four months readying the system for the change in time for implementation.

The majority of industry players whom AsianInvestor spoke to reacted positively, expressing the hope that the change would help to improve stock market dynamics. Certainly, the stock prices of several Korean securities companies bounced upwards on the news. Mirae Asset Securities, NH Securities, Daewoo Securities and Woori Securities all jumped between 4.1% and 5.2%.

Dr Noh Heejin, senior research fellow at the Korea Capital Market Institute, said the change was long overdue. He expects investors to require additional information on listed stocks due to a higher risk of loss via the extended trading band, leading to increased market efficiency and transparency.

“With the expanded band, investors will be more cautious in their trading and there will be more transparency in trading and listed company information,” he noted.
 
He argued, in fact, that the band should eventually be eliminated entirely. “The sooner the better,” he said. However, rather than imposing this in one go, he agreed that it is better to implement such a move gradually, with a 30% band appropriate to begin with.

At the same time, other industry players voiced concern over a potential increase in market volatility due to the band’s increase. The price fluctuation limit, after all, had initially been introduced in April 1995 to stabilise the market.

At first it was set at 6%, before being expanded to 8% in November 1996 and 12% in March 1998. In December of 1998 – amid the fallout of the Asian financial crisis – it was increased to 15%, where it has remained until now.

The point that the majority of market players make now is that the 15% limit was no longer appropriate given that the market is far larger and more stable than in the past.

Japan, Taiwan and China are three Asian markets to have adopted a similar price fluctuation limit from the previous day’s close. The former has a 22% price band, with the last change having been made in March 2013 when it increased it from 18%. Meanwhile, Taiwan has a 7% limit and China a 10% one.

In response to concerns over price volatility, the government noted that it would introduce additional safeguards, including a circuit breaker to shut down the entire market, where necessary.

As an example, if a stock moves up or down more than 3% (for Kospi 200 stocks) or 6% (for other Kospi and Kosdaq stocks) from the last traded price, trading will be suspended.