Published On: Wed, Jan 26th, 2011

KRX Amendment Of Program Trading Rules

KRX has received an approval on new Program-Trading rules and Random-End rules from Financial Services Commission (FSC). These new rules, which are to become effective on May 30th this year after having the IT implementation period, were proposed by KRX to alleviate sharp price fluctuations during “last 10 minute call-auction session on the days when KOSPI200 Futures or Options expire” (hereinafter “the expiration session”). Specifications of the rules were put together by having numerous consultations with relevant market participants and experts to cope with the ’10.11.11 KOSPI200 Options expiration date shock(1).

Under the newly adopted Program-Trading rules, Market Participants will be allowed to place Program-Trading orders during ‘the expiration session’ without having pre-disclosure requirements when there is significant imbalance in amount of disclosed trading buy orders and sell orders (applied to both KOSPI Market & KOSDAQ Market). In addition, for the Random-End rule, there will be additional 3% triggering threshold for ‘the expiration session’ (applied only to KOSPI Market). “Apparently, the Nov. 11th incident has raised industry-wide concerns on extreme price movements in Futures or Options expiration dates and it is KRX’s responsibility to cope with those concerns so not to undermine the market integrity,” said Mr. Cho Jae-doo, executive director of KOSPI Market Division. He also commented that “today’s rule change is part of our efforts to prevent similar incident from happening again and to minimize the irrational market movements during the expiration dates.”

Details of the rule change
Program Trading Rules
Both KOSPI Market Business Regulation & KOSDAQ market Business Regulation define Program-Trading as ‘Index Arbitrage Trading’ and ‘Non-Arbitrage Trading’ and have in place disclosure requirements for transparent market operation purposes (please refer to pg 54~56 of ‘2010 Introduction to Trading in KRX Stock Markets (click)’ for further explanations). When market participants are planning on placing Program-Trading orders during ‘the expiration session,’, they are required to disclose the planned orders in advance by no later than 14:45, that is 5 minutes prior to the commencement of ‘the expiration session’ (a.k.a. Sunshine Policy).

However, under the new rules to be effective on May 30th, when there is significant imbalance in amount of disclosed Program buy orders and Program sell orders, market participants will be able to place opposite side (smaller value side) Program-Trading orders without having pre-disclosure. Instead, these opposite side Program-Trading orders shall be disclosed by 16:00 of the same day. ‘Imbalance’ will be triggered (and announced by KRX immediately) when nominal value* of Program sell (or buy) orders exceeds the nominal value of Program buy (sell) orders by 75% * and when the gap between nominal values (buy orders and sell orders) is greater than 500 billion KRW (incase of KOSDAQ Market, triggering level shall be 75% and 5 billion KRW).

* The nominal value shall be calculated by the quantity of pre-disclosed Program-Trading orders multiplied by corresponding share prices at 14:45.
* Triggering value (500 billion KRW): greater nominal value (out of nominal value of buy orders and nominal value of sell orders) subtracted by smaller nominal value.
* Triggering ratio (75%): triggering value divided by smaller nominal value.

When the ‘imbalance’ is triggered by greater buy orders, then market participants may place Program sell orders (and vice versa) during ‘the expiration session’ even without having submitted the pre-disclosure by 14:45. These post-disclosure Program-Trading orders shall be subject to following price limitations; buy orders shall not be placed at prices higher than the previous price (last price published before entering into the closing price call-auction session) and sell orders shall not be placed at prices lower than the previous price.

Random-End Rules (applies only to KOSPI Market)
KOSPI Market has adopted the Random-End rules back in 2004 to prevent possible price manipulations of deceptive (not intended to be traded) orders during Call Auction Sessions (KRX runs Call Auction session to determine the opening price and the closing price of any trading day). Currently, Random-End is triggered when the final call price deviates by more than 5% from either the highest or the lowest preliminary call prices published during last 5 minutes of the call auction session. And, when triggered, call execution time will be extended to a point (5 minutes at max) randomly decided by the trading system (please refer to pg 42 of ‘2010 Introduction to Trading in KRX Stock Markets (
click)’ for further explanations).

Under the new rules, in addition to the current triggering threshold, Random-End will be triggered when final call price deviates by more than 3% from its previous price (last price published at 14:50). This additional triggering threshold applies only to closing auction session of expiration dates of either KOSPI200 Futures or KOSPI200 Options.

(1) On Nov. 11th 20011, driven by heavy program selling (net program selling amount reaching 2.1 trillion KRW, the previous peak was 1.1 trillion KRW in December 2007)) during ‘the expiration session’, KOSPI index closing value suddenly fell by 50pts(2.5%) from its previous value. Majority of those Program sell orders was allegedly placed by overseas institution to close out its existing arbitrage position.

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