Exchange-traded funds (ETFs) are not expected to be traded in the Korea Exchange (KRX) after-market (night session) that opens next month. The decision reflects concerns that, if ETF trading hours are greatly extended, premium/discount management would not function properly and could hurt investors, while also adding to the burden on the asset management industry.
According to the financial investment industry on the 21st, the exchange received from the asset management industry a proposal to "postpone implementation of the ETF after-market," which was resolved at the Korea Financial Investment Association presidents' meeting on the 10th of this month. The exchange had been pushing to introduce night trading for ETFs in step with the expansion and overhaul of the stock market after-market (4 p.m.–8 p.m.) starting on Sept. 14.
A representative at a domestic asset management company said, "All asset managers agreed that, under the current system, conducting night transactions is difficult, and resolved to submit an 'unable to implement' opinion," adding, "At a roundtable with the exchange attended by working-level staff from each manager, we conveyed the industry's position, and the exchange also appears inclined to accept the industry's request to hold off in order to prevent market side effects rather than push ahead rashly."
Above all, the industry emphasized that, in the after-market, it is impossible to calculate and link the real-time indicative net asset value (iNAV), which is fundamental to ETF trading. According to the industry, unlike the regular session, the night market still lacks a system for real-time iNAV calculation and linkage. In this situation, investors would have no choice but to engage in "blind trading" without knowing the precise value of an ETF.
It is also critical that creation and redemption (issuance and cancellation) are not possible after the regular session ends, and that liquidity providers (LPs) can run out of sell inventory. In the regular session, when supply-demand imbalances arise in an ETF, managers and LPs adjust prices through creation and redemption, but after the market closes, that process stops.
For an LP to submit sell quotes at night, it must hold prior inventory (balances), but given capital capacity, the industry judges that to be unrealistic.
A representative at an asset management company explained, "To extend the creation and redemption system into the night, not only managers but also custodian banks, fund administrators, the Korea Securities Depository (KSD), and other parts of the financial market would first need to revamp IT infrastructure and staff night shifts," adding, "If ETFs are traded in the after-market without that preparation, the impact will carry straight into the next day's opening trades in the regular session and directly translate into losses for individual investors."
An exchange official said, "Nothing has been specifically set regarding the timetable for introducing an ETF after-market," while noting, "We are continuing internal review, communicating fully with the industry as we comprehensively examine the potential market impact and overall conditions."