Korea Exchange (KRX) will prohibit exchange-traded funds (ETF) and exchange-traded notes (ETN) from being bought and sold like common stocks in the aftermarket that opens on the 14th of next month. Instead, to meet demand to trade ETFs and ETNs after the close, it will sharply lower the minimum size for after-hours block trades from the current 500 shares to 1 share.
According to the financial investment industry on the 31st, Korea Exchange (KRX) on the 28th prepared a draft partial amendment to the Enforcement Detailed Rules of the Stock Market Business Regulations that includes these measures.
The core of the amendment is the creation of an after-hours continuous trading session, the so-called aftermarket, in which stocks can be traded continuously from 4 p.m. to 8 p.m. after the regular session ends.
However, ETFs and ETNs are excluded from aftermarket trading. The amendment specifies ETFs and ETNs as exclusions from after-hours continuous trading, along with issues not traded during the regular session that day, issues under administrative designation, investment warning/risk issues, abnormally surging issues, and illiquid issues.
Accordingly, even if the aftermarket opens, investors will not be able to place limit orders and buy or sell ETFs and ETNs like common stocks between 4 p.m. and 8 p.m.
The exchange's decision to exclude ETFs and ETNs appears to reflect product characteristics. For ETFs, it is important to keep the gap between underlying asset value and market prices at an appropriate level, but concerns have been raised that after the regular session it is difficult to smoothly provide real-time indicative net asset value (iNAV) calculation, creation and redemption, and liquidity provision.
It also appears to have considered that if price volatility increases during hours with low trading volume, it could lead to investor losses.
While preparing to introduce the aftermarket, the exchange also reviewed extending ETF and ETN trading hours. It even identified products that managers could participate with, but as controversy over volatility in single-name leveraged ETFs recently flared up, it is interpreted that the launch phase puts more weight on investor protection.
However, the possibility that ETFs and ETNs will be included in the aftermarket in the future is not completely closed. The amendment contains an exception clause allowing the exchange to set different after-hours continuous trading eligibility if deemed necessary for market management.
Not all ETF and ETN trading after the close will be blocked. The exchange decided to lower the minimum quote size for after-hours block trades from the current "at least 500 times the trading unit" to "at least 1 time."
For an ETF with a trading unit of 1 share, previously at least 500 shares had to be traded to use after-hours block trading, but going forward it will be possible with just 1 share. While it blocks placing regular orders in the market to trade continuously with other investors, it effectively removes the threshold for a separate block-trade method in which the seller and buyer set the price and quantity and submit a request.