It was confirmed that the reason for the trading delay of a Dongyang Steel Pipe item on the 18th resulted in an unprecedented halt in transactions for all KOSPI stocks, due to the matching system. The matching system is a program through which the Korea Exchange receives investor orders via securities companies and facilitates transactions, essentially serving as the server.
If each listed stock had its own matching system (server), anomalies in individual stocks would not spread to the entire market; however, this is virtually impossible. For this reason, the Korea Exchange grouped stocks together to develop the matching system, but unfortunately, Dongyang Steel Pipe was included in the group containing all KOSPI stocks. This led to the unprecedented situation where all KOSPI stock transactions were halted.
According to the financial investment industry on the 21st, the Korea Exchange operates the matching system in three groups in the KOSPI market and two groups in the KOSDAQ market. The KOSPI is divided into three groups: ▲securities products such as exchange-traded funds (ETFs) ▲new companies listed within the last five days ▲and all other stocks. The KOSDAQ market, lacking securities products, is divided into two groups excluding securities products from KOSPI (▲new companies listed within the last five days ▲and all other stocks).
Dongyang Steel Pipe, listed in 1973, belongs to the 'all other KOSPI stocks' group. As a result, when the transaction of Dongyang Steel Pipe was delayed on the 18th, transactions for the majority of KOSPI stocks on the same server were halted for 7 minutes (from 11:37 a.m. to 11:44 a.m.).
The Korea Exchange explained that transactions for Dongyang Steel Pipe and other companies such as CK Solution and Seoul Guarantee Insurance were conducted normally since they had not been listed for more than five days. Transactions for these two stocks occurred from 11:37 a.m. to 11:39 a.m., while coincidentally, there were no transactions for them from 11:40 a.m. to 11:43 a.m. It is presumed that investors, thinking that transactions were impossible due to the halt in trading for all KOSPI stocks, did not place orders.
Even though trading in the KOSPI market was halted, the exchange-traded funds (ETFs) were able to transact because they operated on a different matching system.
The delay in the trading of Dongyang Steel Pipe was a result of a combination of coincidences. The Korea Exchange has a system in place that blocks self-dealing transactions where an investor sells stocks they own while simultaneously buying them back. This is to prevent market manipulation and inflated trading volumes. Additionally, the introduction of a midpoint price due to the recent launch of the alternative exchange NextTrade has caused issues.
A midpoint price is the average price between the highest price offered by buyers and the lowest price offered by sellers, and it can be calculated with decimal points. For example, if the best bid price is 1,001 won and the best ask price is 1,002 won, the midpoint price would be 1,001.5 won.
Particularly for stocks like Dongyang Steel Pipe, which have prices below 2,000 won, the price unit for bids is 1 won, so there is a high likelihood that the midpoint price will be a decimal. The Korea Exchange removes the decimal portion and posts the price as the same as the best designated price.
When a self-dealing prevention condition bid occurs, the volume of transactions that can be executed must be recalculated including the midpoint price bid quantity, but this was overlooked, leading to discrepancies in the actual executed volume. The Korea Exchange immediately halted trading.
The situation where the trading execution system for the entire exchange was delayed due to issues at Dongyang Steel Pipe was resolved seven minutes after the incident occurred.
There remains a possibility that if an error occurs with one stock, it could spread to the entire group that includes that stock. However, since this is the first such incident since the launch of the Korea Exchange in 2005, it is not common.
The Korea Exchange noted, 'To resolve the issue, we held company-wide meetings and discovered the error and took measures,' adding, 'We will conduct joint system checks with NextTrade every weekend until the system stabilizes.'