The Korea Exchange has announced plans to introduce the KRX Total Market Index (TMI), which encompasses the KOSPI and KOSDAQ markets. Analysts predict that if this index is widely used as a benchmark, it could help prevent extreme fluctuations in the stock prices of newly listed companies.
Kim Dong-young, a researcher at Samsung Securities, noted on the 9th in a report titled 'The significance of the KRX TMI' that the most prominent feature of the KRX TMI is its adoption of a free-float market capitalization weighting method. The free-float market capitalization is calculated based only on the shares that are actually traded in the market. The KOSPI index uses a simple market capitalization weighting method.
Research Institute Kim expects that utilizing the KRX TMI as a benchmark will reduce the risk of extreme volatility in the stock prices of corporations during the initial trading phase of initial public offerings (IPOs). For instance, when a corporation with a market capitalization of 100 is listed on the KOSPI, passive funds tracking the KOSPI index must purchase shares of that corporation according to its 100 market capitalization weighting. In contrast, passive funds following the KRX TMI can buy shares of the corporation, excluding those owned by major shareholders or those under lock-up, from that 100 market capitalization.
Research Institute Kim stated, "Using the KRX TMI as a benchmark will lessen the pressure to forcibly buy IPO stocks with low initial trading volumes," adding, "This creates an effect that prevents drastic price fluctuations in IPO stocks based on passive flows."
Research Institute Kim expects that the widespread use of the KRX TMI will also reduce the frequency of corporations transferring from the KOSDAQ to the KOSPI. The primary reason corporations move to the KOSPI is to expand liquidity and anticipate a rise in stock prices through funds that track the KOSPI index.
Research Institute Kim noted, "Because the KRX TMI assesses stocks from both the KOSPI and KOSDAQ markets using the free-float market capitalization weighting method, if the benchmarks of major pension funds change to the KRX TMI and its sub-indices, it could mitigate the side effects of corporate transitions," adding, "This will also help stabilize the operations of the KOSDAQ market."
Research Institute Kim expressed hope that this opportunity will lead to a greater adoption of free-float market capitalization weighting indices as benchmarks in the domestic market. Indices from Standard & Poor's (S&P), Morgan Stanley Capital International (MSCI), and the Financial Times Stock Exchange (FTSE) all use the free-float market capitalization weighting method.
Research Institute Kim stated, "If indices such as the KRX TMI using the free-float market capitalization weighting method are widely utilized as benchmarks, various improvements, including a reduction in frictional transactions, will manifest, which will ultimately aid the development of the Korean stock market in the long term."
The Korea Exchange plans to announce on the 13th the KRX TMI along with four types of KRX TMI categorized by size: large, mid, small, and micro. The regular updates for the index will be conducted on the next trading day following futures expiration dates in March, June, September, and December each year.