A rare incident occurred on the 18th when trading on the KOSPI was halted for 7 minutes due to a system error at the Korea Exchange. Investors who claimed they incurred losses because they missed buying and selling opportunities are demanding compensation.
However, the likelihood of actual compensation being provided is considered low by industry consensus. This is because the duration of the error was relatively short, and it is not easy to prove specific damages. Additionally, it is likely to fall under the exemptions from liability of the exchange. The exchange established dispute handling guidelines in 2023, but there have been no cases of compensation based on those guidelines yet.
Nevertheless, the credibility of the Korea Exchange, which has emphasized system stability, has inevitably been affected.
According to the exchange, from 11:37 a.m. to 11:44 a.m. the day before, a system malfunction occurred across all listed securities, starting with DONG YANG STEEL PIPE, causing delays in the execution of stock transactions. After the system was restored, bids were received normally, but trading of DONG YANG STEEL PIPE was halted from 12:05 p.m. to 3 p.m.
Some investors claimed in stock discussion rooms, "I lost 7 million won because I couldn't sell in time due to the server downtime," and "I couldn't buy other stocks because the order execution for DONG YANG STEEL PIPE was delayed," stating that they suffered investment losses due to the system malfunction.
There are also mentions of potential claims for damages being submitted to the Korea Exchange according to electronic financial transaction dispute handling guidelines. Since the afternoon of the previous day, posts have been continuously uploaded on social media about gathering evidence for damages related to the system malfunction and ways to respond to the system error.
The guidelines implemented by the exchange since May 2023 state that compensation will be provided in cases where the exchange is unable to receive bids or execute transactions due to system malfunctions, and where it is objectively possible to confirm the intention to trade. The department responsible for risk management at the exchange will handle the payment of compensation.
There are overseas examples of compensation measures related to system errors. On Jan. 24, 2023 (local time), the New York Stock Exchange (NYSE) experienced severe price fluctuations in about 250 stocks shortly after opening due to a backup system operation error, and trading on over 80 stocks was halted for about 30 minutes. The NYSE later announced plans to compensate investors who suffered losses as thousands of transactions had been invalidated. According to Reuters, the NYSE stated, "We will fully refund the orders affected by the system error according to regulations," adding, "This is part of the protections that come with trading on a transparent and open exchange."
However, this KOSPI outage incident is likely to fall under the exemptions for liability. The guidelines include exceptions such as 'cases where it is difficult to recognize damages due to price delays or delays in transaction execution,' and 'in cases where compensation for expected profits from new transactions sought after a system malfunction is requested.'
The exchange maintains that there was no substantial damage since transactions were sequentially processed after trading resumed, and the short duration of the error makes it difficult for investors to specifically prove what losses were incurred during that time.
Although securities firms can first compensate customers for their losses and then seek recourse from the exchange, it is unlikely that the securities firms will take the initiative to compensate for an error caused by the exchange.
The exchange established a task force in June of last year to improve its response processes for system malfunctions and has emphasized the operation of a 'flawless' market by establishing various preventative and response systems. However, it seems inevitable that the exchange's credibility will be impacted due to this recent system error.
This year, the average daily trading volume for the KOSPI was recorded at 470.66 million shares, and the trading value was 11.1692 trillion won. In the 7 minutes during which the error occurred, approximately 8.45 million shares and 20.05 billion won could have been traded. The repercussions of the system error could be equally significant.
A representative of the exchange stated, "We sincerely apologize for the inconvenience caused to investors due to this system malfunction," and noted, "As the number of products traded on the alternative exchange, Next Trade, will increase to 800 on the 31st, we will conduct joint inspections with Next Trade every weekend until the end of April to prevent similar occurrences."