After climbing to 9,000 points this year in a steep rally, the KOSPI index has plunged 23% in just 13 trading days this month, shaking Korea's stock market. As volatility peaks, Korea Exchange (KRX) is soliciting bids for a research project to analyze the market impact of high-frequency trading (HFT) and review regulatory directions. With the volume of high-frequency trading transactions surging this year, the exchange aims to assess its impact on the market and prepare regulatory improvements.
According to Korea Exchange (KRX) and others on the 20th, bid applications close on the 27th, and the research project aims to be completed in the second half of this year.
High-frequency trading, also called ultra-fast trading, uses computer algorithms to place orders at high speed. Unlike general program trading, which automatically executes bulk orders under certain conditions, high-frequency trading fires off orders by exploiting split-second time gaps below a second, without human intervention. The share of foreign institutional investors is particularly high, and it is mainly used for arbitrage that targets momentary price differences.
By design, high-frequency trading struggles to generate revenue when the security transaction tax rate is high, but the potential to generate revenue grows as the rate falls. Since the security transaction tax rate was cut in 2019, concerns about market disruption stemming from a surge in high-frequency trading have been raised continuously.
In particular, as the stock market has heated up recently with overall trading volume rising and the index swinging sharply, the scale of high-frequency trading appears to have expanded further. That is because high-frequency trading tends to increase when market volatility is high and there are many buyers seeking immediate execution.
High-frequency trading does not always harm the market. Senior research fellow Kang So-hyun at the Capital Market Research Institute said, "Participants engaged in high-frequency trading play the role of market makers who bridge the gap when bid and ask prices widen."
The exchange will also analyze the size and impact on the stock market of spot–futures linked high-frequency trading using securities products such as leveraged exchange-traded funds (ETFs) or derivatives, and of high-frequency arbitrage between Korea Exchange (KRX) and NEXTRADE (NXT). In Korea's stock market, beyond individual stocks, high-frequency trading is also possible in ETFs.
The exchange plans to lay the groundwork for a regulatory framework after analyzing the market impact through this research project. Currently, risk control mechanisms such as the high-speed algorithmic trader registration system introduced in 2023 and the kill switch (bulk order cancellation system) are in place.
An exchange official explained, "Amid concerns that high-frequency traders negatively affect the market when conditions are difficult, as in the U.S. 'flash crash' (a sudden plunge in the stock market without apparent cause), the aim is to see what impact they actually have on our market."