Nextrade will introduce a single-price auction for premarket opening prices starting Jan. 18 next year, aiming to change a pricing structure under which a single share traded could push a stock to its daily limit. Rather than letting the first small order dictate the opening price, the exchange will reflect buy and sell demand accumulated over two minutes to reduce price distortions. The change also gives Nextrade its own mechanism for determining an opening price by collecting orders ahead of the Korea Exchange's regular session. Still, with limited participation from institutional and foreign investors, broadening the investor base to make prices more representative remains a challenge.
In the premarket, trades are currently executed immediately from 8 a.m. whenever buy and sell prices match, but from next year a period for accumulating orders will precede the first execution, according to the financial investment industry on the 20th. Orders placed between 8 a.m. and 8:02 a.m. will be gathered and matched at a single price for the first trade, after which the market will switch to continuous trading.
Continuous trading allows immediate execution when orders match, but it is vulnerable to price distortions when liquidity is thin right after the open. If limit-up or limit-down orders meet before enough bids and offers have built up, even a minuscule trade can set that price as the opening price.
The problem has recurred even among large-cap stocks. On July 28 this year, SK hynix (000660) hit its daily limit-down on a single share traded immediately after the premarket opened. That price fed into price calculations in overseas crypto derivatives markets, leading to losses of about 80 billion won ($56 million). On Aug. 5, Samsung Electro-Mechanics (009150) and Alteogen (196170) each opened at their limit-up on a single share traded, and the following day SK hynix again hit its limit-down on just 11 shares. The episodes exposed how even actively traded stocks can see prices swing sharply on small orders at the moment of the open.
As concerns over price stability mounted, Nextrade temporarily restricted limit-up and limit-down orders in the premarket from Aug. 12 and introduced a static volatility interruption (VI) mechanism on the 14th of last month. If a trade would be executed at a price more than 10% above or below the previous session's close shortly after the open, execution is halted and orders are collected for two minutes to be matched at a single price. The existing dynamic VI was also revised so that, instead of resuming continuous trading after a halt, trading passes through a single-price auction.
The introduction of the single-price opening auction is also notable because it gives Nextrade its own procedure for forming an opening price ahead of the Korea Exchange's regular session. The exchange currently collects orders for 30 minutes, from 8:30 a.m. to 9 a.m., to determine the opening price for the regular session. With Nextrade setting its first price the same way, the premarket price — a gauge of investor sentiment before the regular session opens — is expected to gain credibility. The premarket accounts for more than one-fifth of Nextrade's total trading value. From the 1st to the 19th of this month, average daily premarket turnover was 2.62 trillion won, or 22.2% of Nextrade's total, and its monthly share has stayed between 20% and 25% this year.
The single-price auction will not, however, suppress price swings themselves. Even with orders pooled, the opening price can move sharply if buying or selling is heavily skewed to one side. Nor can price representativeness be secured through trading-method changes alone. Reflecting supply and demand across the broader market requires a wider investor base. "The premarket still has limited participation from institutional and foreign investors, so it is hard to call it a price formed by the entire investor base," an official in the financial investment industry said.