FSC Grants Final Approval to Nextrade for Operation of ATS Scheduled to be Launched on March 4

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FSC Grants Final Approval to Nextrade for Operation of ATS Scheduled to be Launched on March 4 Feb 05, 2025

The Financial Services Commission held a regular meeting on February 5 and granted final approval to Nextrade for operating an alternative trading system (ATS). The introduction of an ATS in domestic stock market will officially set off a multiple-exchange and competition-based stock trading system in Korea.

As part of capital market reform efforts, the government first established legislative grounds for ATS in 2013 with aims to make capital market more accessible through diversification of stock market infrastructures and improvement in transaction convenience for investors.

After granting preliminary approval to Nextrade in July 2023, the FSC and related organizations held a seminar on May 9, 2024 where the authorities introduced a set of measures on ATS operation and integrated market management and oversight plans. Based on diverse opinions discussed at this seminar, Nextrade took steps needed to prepare its organization and set up a trading operation and filed an application to the FSC on November 29, 2024 to obtain final approval for operating ATS.

After having an external review conducted by a committee of private sector experts and going through a screening of qualifications by the Financial Supervisory Service (FSS), the FSC decided to grant final approval to Nextrade for the operation of ATS.

Expected Changes in Trading Experience with Nextrade

Nextrade plans to begin operating from March 4, 2025. Nextrade’s launch is expected to bring about increased benefits to investors, such as extended trading hours, availability of more diverse order types, and reduction in transaction costs resulting from competition over fees. The market oversight and supervisory framework will also shift to an integrated system to ensure investor protections.

I. A new stock trading experience

Aside from regular trading hours, which will be identically operated by both the Korea Exchange (KRX) and Nextrade, the ATS will operate pre-market (between 08:00 and 08:50) and after-market (between 15:30 and 20:00) sessions. As a result, daily trading hours in Korea will be extended to twelve hours.

In addition, there will be changes regarding the duration in which the KRX displays potential execution prices at opening and the items tradable at the KRX in off-hours auctions. During KRX’s opening and closing auctions, Nextrade will temporarily suspend transactions. The changes are intended to prevent price manipulation, while continuing to maintain the significance of what opening and closing prices represent.

More specifically, KRX’s opening auction hours will remain the same as now between 08:30 and 09:00, but the duration in which it displays potential execution prices at opening will be reduced to ten minutes (between 08:50 and 09:00). During this time, Nextrade will temporarily suspend transactions. In addition, KRX’s closing auction hours will also remain the same as now for ten minutes (between 15:20 and 15:30). During this time, Nextrade will temporarily suspend transactions. At the previously held seminar in May 2024, a shortening of closing auction hours to five minutes (between 15:25 and 15:30) was proposed, but after taking into account opinions from market participants, the authorities decided to maintain the current hours.

Meanwhile, with the availability of after-market session operated by Nextrade, during KRX’s off-hours auctions (between 16:00 and 18:00), the items traded at KRX will be off-limits for trading at Nextrade.

In addition, there will be more types of orders available. Currently, there are market orders and four types of limit orders available in domestic stock market. In addition to these, mid-point orders, which automatically adjust the price to the mid-rage of the best bid-ask orders, and stop-limit orders, which instruct brokers to place limit orders when the investor-specified stop trigger price has been attained, will be newly made available to investors. The KRX will also make available these newly introduced order types in time for Nextrade’s launch. Their addition will offer investors wider options in terms of their investment strategies.

With regard to the level of transaction fees, Nextrade will offer 20 percent to 40 percent lower fee levels for orders executed in comparison to KRX’s current fee levels, which will help to boost competition and lower transaction costs for investors.

II. An integrated market management and oversight

With the operation of KRX and Nextrade in tandem, there will be an integrated market management and oversight system. First, securities companies will be required to observe the best execution rule obligating them to prepare standards for exercising reasonable diligence in executing transactions at the most favorable terms available for investors.

To provide clearer standards for securities companies in their preparations for a multiple-exchange system, the FSS introduced guidelines on best execution rule in June 2024. In accordance with the guidelines, securities companies will prepare their own best execution standards and establish smart order routing systems (SORs), while distributing information about their best execution standards to investors prior to taking transaction orders and executing orders in automated mechanisms based on the best execution standards.

In the meantime, the management and supervision over short selling will be maintained at a consistent and rigorous manner for Nextrade. Short selling will be restricted in pre-market and after-market sessions, so placing short sale orders at Nextrade will only be allowed during regular trading sessions (between 09:00 and 15:20). Relevant rules on the displaying of short sale orders and the designation of overheated short sale items will be identically applied to Nextrade, while the uptick rule, which is designed to prevent price declines inflicted directly by short selling, will be operated based on the last executed price in each market.

Moreover, Nextrade will be subject to the same price limit, market stabilization mechanisms, market surveillance, and clearing and settlement process currently applied to the KRX. Nextrade’s price limit will be ±30 percent of KRX closing price, and the price limit for after-market sessions will also be ±30 percent of KRX closing price. Nextrade will also be subject to KRX’s trading suspension, circuit breaker, and sidecar mechanisms, and its market surveillance and clearing functions will be performed by the KRX. Transactions at Nextrade, including in pre-market and after-market sessions, will be cleared and settled in two business days (T+2).

The FSC, FSS, and KRX plan to strengthen market monitoring to prevent unfair trading activities from taking place in a multiple-exchange based market system, while ensuring strict responses and sanctions against unfair transactions to foster a more credible environment and promote fairness in capital market.

III. Additional capital market reform items

To ensure a seamless operation of the ATS, the FSC plans to continue to work on additional capital market reform items. On February 3 this year, the FSC issued a preliminary notice of regulatory changes allowing ATS to trade exchange traded funds (ETFs) and exchange traded notes (ETNs). Since transaction fees charged by ATS can also have an impact on stock market’s overall transaction costs, related rule changes will be sought to make ATS subject to deliberation by the market efficiency promotion committee. Other regulatory reform items also include ways to make the soundness regulation more reasonable for ATS.

Further Plan

Nextrade has been running pilot market operations along with the KRX, securities companies, and other related organizations, and it will work to make sure that the newly launched trading system is operating in a stable way. As of now, a total of 32 securities companies showed interest in participating in Nextrade and the number is expected to grow in the future.

Nextrade will select highly liquid items from KRX-listed securities for its tradable items. For the first four weeks after launch, the number of tradable items will be added gradually every week—from 10 (in week one) to 110 (in week two) to 410 (in week three) to 800 (in week four)—to guarantee system stability at the beginning and give sufficient time to adjust for both securities companies and investors. From the end of June 2025, an announcement on the selection of tradable items will be made five trading days prior to the quarter-end every quarter, and the announced items will be made available for trading from the first trading day of the following quarter.

Meanwhile, the FSS is continuing to work on providing guidance and supervising securities companies with their best execution standards and SOR systems. The Korea Financial Investment Association (KOFIA) plans to produce and distribute video advertisement providing information about the multiple-exchange based market system and make sure a smooth transition for its members and their customers. There will be a series of information sessions held in successive meetings with diverse audiences to make sure that they are provided with sufficient information about expected changes and issues that need to be noted.

• Please refer to the attached PDF for details.

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