As volatility in global stock markets has grown amid a U.S.-Iran war, extreme price swings are appearing on the alternative exchange NEXTRADE (NXT).
Some retail investors are exploiting this asymmetric situation to engage in ultra-short-term arbitrage. Experts say that, given the premarket's low-liquidity nature and the high risk of price distortion, additional liquidity control mechanisms to protect investors are urgently needed.
On the 8th, SK hynix showed an extreme price gap between NXT and the Korea Exchange (KRX) regular session. In NXT's premarket that day, SK hynix transacted at 1.1 million won, up 20%, but in the KRX regular market it opened at 1 million won, up 9%, showing a price difference of nearly 11%. The intraday high was 1,056,000 won, with a maximum swing of 15.6%.
This is not the first time such extreme volatility has occurred. On Feb. 6, in the NXT premarket, Samsung Electronics briefly plunged to the lower limit at the open on artificial intelligence (AI) concerns and transacted at 111,510 won. But in the main session, the low was 158,500 won, down 4.8%. The decline differed by more than 20%.
Experts note that such sharp price swings can send distorted price signals to investors. In low-volume conditions, transactions executed at a few quotes can set prices that diverge from actual market supply and demand or corporations' value.
Lee Hyo-seop, head of the financial industry division at the Korea Capital Market Institute, said, "If prices surge or plummet in the premarket, investors may take that as important information," and added, "There is a possibility of distorted price signals, so institutional improvements are needed over the mid to long term."
A retail investor–centric market structure is cited as the backdrop for the heightened volatility on NXT. Kang So-hyun, head of the capital markets division at the Korea Capital Market Institute, said, "Information that emerged overnight tends to be reflected first in the premarket," but added, "However, because the retail investor share is high, if there are gaps in quotes, price volatility can increase." According to NEXTRADE (NXT), as of March this year, retail investors accounted for more than 85% of NXT transactions.
By contrast, on the exchange market, liquidity-provision schemes operate to enhance price discovery. Since 2016, the exchange has signed market-making contracts with securities investment firms and introduced a market-making system that continuously presents two-way bid and ask quotes to mitigate price volatility. For low-volume stocks, it also supports maintaining quote spreads through a liquidity provider (LP) system.
However, NXT has not yet introduced such liquidity-provision schemes. A NEXTRADE (NXT) official explained, "For liquidity providers to participate, a reduction in the security transaction tax is necessary, but under the current system, while it can apply to the exchange, it is difficult to apply to an alternative exchange."
NEXTRADE (NXT) is also preparing institutional improvements to ease price volatility. Currently, a dynamic VI is in place that halts transactions for 2 minutes if there is a change of 3% to 6% or more from the last transaction price, and starting on Sept. 14, a static VI will be introduced that temporarily suspends transactions if the price changes by 10% or more from the previous day's close. When a VI is triggered, quotes are collected for a set period and transactions are executed in a single-price auction.
Some, however, voice concern that this could limit investor choice. A securities industry official said, "If transactions are taking place at a specific price in the premarket, it means there are investors willing to buy and sell at that price," and added, "Expanding single-price auctions could limit the choices of investors who want quick execution."
In practice, some retail investors are engaging in ultra-short-term arbitrage by taking advantage of high volatility. An office worker, a person surnamed Kim, 31, saw Sam Chun Dang Pharm plunge around the 400,000-won level on NXT on the 8th, bought at 410,000 won, then sold at 470,000 won in the regular session to realize a profit. Another investor, a person surnamed Cho, 26, said revenue was made by selling SK hynix at 1.1 million won on NXT and then buying again in the 1 million won range on the exchange.