South Korea will allow wider fluctuation in daily stock prices in an attempt to give the dulled local equity market a much-needed boost and strengthen the autonomy in price-setting, the country's financial regulator said Tuesday.
South Korea currently limits daily price changes to 15 percent, a rule that has been in place for nearly 16 years despite the growth in the size of the bourse and market cap.
"We will expand the daily price limit to some extent, for example, 30 percent, in order to beef up the market's price discovery function," the Financial Services Commission (FSC) said in its report to the trade-investment promotion meeting chaired by President Park Geun-hye.
"Along with the expansion, we will also adopt volatility interruptions to control potentially extreme price fluctuations."
The daily limit in stock price fluctuation was imposed by the authorities for the first time in 1995 as a protection against extreme volatility and manipulation within the market.
The ceiling for the main KOSPI bourse was set at 6 percent in
1995 and was increased to 8 percent the following year. It went up to 15 percent at the end of 1998.
Market watchers argue that the imposed daily limit has failed in setting appropriate share prices through supply and demand and hampered investors from freely buying and selling equities in the South Korean market. The United States and other advanced countries in Europe do not have such a regulation.
"The daily limit controls today's price based on yesterday's closing price. Regardless of any big issues and events that occur today, the share price cannot exceed the ceiling set by the previous day's events," said Lee Hyun-chul, head of the Financial Policy Bureau at the FSC.
"Also, you couldn't sort out the lemons and peaches in the market. The peaches deserve to soar more than 15 percent but can't, while the lemons should be kicked out of the market but aren't,"
"We are aiming at strengthening the market's price discovery mechanism by easing the 15 percent daily limit."
The FSC said there will be safeguards to increase price continuity and stability, and to reduce volatility in the local stock market, which is still vulnerable to external stimulus and changes widely in price.
The volatility interruptions are triggered when a call lies outside the specific price thresholds.
For example, when a broker makes a trading order for more than
3 percent of the last trade price, the trading of the stock is automatically changed to a pre-call phase for two minutes.
Also, the share price cannot hit the daily limit at just one call.
The FSC acknowledged that the planned changes in the price band will take time because it will require an all-out system change in the main bourse operator and brokerage firms.
"We need physical time as all players concerned haven't agreed to this issue yet," said Lee from the FSC. "If the system change is completed by the end of the year, we expect to implement the changes starting in January." (Yonhap)