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Eased limits on stock price changes off to smooth start

The Korean stock operator’s decision to expand the daily stock price limit and thus to increase market resilience has made a soft landing, despite worries that the measure would create excessive volatility.

Starting from Monday, the Korea Exchange doubled the daily price limit to 30 percent for stocks traded on the main KOSPI and secondary KOSDAQ markets.

The effect of the alleviation was visible on the first day, especially in the tech-laden KOSDAQ sector, but the overall impact on the stock market in general was not as drastic as anticipated.

Monday, 16 stocks took a steep rise, soaring beyond the conventional ceiling of 15 percent, and seven of them hit the new ceiling of 30 percent. Up early, the home trading system of some of the local securities firms temporarily halted operations, due to excessive access.

But on Tuesday, KOSPI closed at 2,028.72, down 13.6 points or 0.67 percent from the previous day. Smaller-cap KOSDAQ showed a slight upturn, closing at 706.28, up 0.06 percent from the previous day.

The price limit system started in 1995 with a 6 percent cap, which later changed to 15 percent in 1998 to reflect market fluctuations amid the Asian financial crisis.

The restrictions have protected retail investors by curbing excessive price changes, but has also caused imbalance by preventing prices from adjusting to market variables.

It is the stock operator’s claim that the recent limit range expansion was necessary, considering the rapid growth of the local equity market over the years.

Also, under the new alleviated system, stock prices will more promptly reflect the actual corporate value, making market manipulation more difficult, the KRX said.

As for the concerns of excessive price fluctuations, the KRX said that it will adopt a series of defensive measures, including the circuit breaker.

The mechanism allows the KRX to halt trading for 20 minutes if the benchmark falls by 8 percent or more, and once again when it breaks the 15 percent line. It may also shut down the daily session, should the index crash by more than 20 percent.

Currently, the KRX is only allowed a 20-minute trading suspension, in the case that the index falls 10 percent.

By Bae Hyun-jung (