As the Korean Exchange prepares to launch its aftermarket on September 14, the likelihood of exchange-traded funds (ETFs) being included in trading has diminished. Asset management firms are reportedly uniting in their decision not to participate in the application process for trading due to concerns over increased liquidity provider (LP) management burdens amid market volatility.
According to the financial investment industry on July 31, executives from asset management firms reached a consensus during a meeting on July 29 at the Korea Financial Investment Association, agreeing to approach aftermarket ETF trading with caution.
As a result, it is likely that these firms will not apply for the ETFs designated for aftermarket trading by the Korean Exchange. The exchange plans to conduct the first round of applications by July 7, followed by a second round at the end of this month.
This development comes less than two months before the aftermarket is set to open. Initially, the exchange had conducted two rounds of preliminary demand surveys in March and early July, predicting that over 70% of the total ETF market, based on assets under management (AUM), would be included in the aftermarket trading. It was also reported that the related IT systems had been built and tested.
However, recent increases in market volatility have shifted the sentiment among asset management firms. Concerns have been raised that LPs may face risks of significant price fluctuations due to liquidity shortages when buying and selling underlying assets to maintain the benchmark prices of ETFs in the aftermarket.
One industry insider stated, "If a positive event occurs in an ETF with a high proportion of small and mid-cap stocks, and funds flow in rapidly, the LP would need to buy that stock in the aftermarket. If trading volume is insufficient, prices could soar to the upper limit. There have been recent instances where some stocks surged during rebalancing due to trading difficulties, and the risks could be even greater in the aftermarket."
Another industry source noted, "While there is still time left for applications, the overall perception in the industry is that both securities firm LPs and asset managers are facing increased burdens, with little benefit from aftermarket trading. A review of whether sufficient safeguards and protective measures for market stability have been established should precede any decisions."
The Korean Exchange has stated that it will proceed with the application process as planned. However, single-stock leveraged products that have recently sparked controversy will be excluded from aftermarket trading. An exchange official commented, "We are reviewing supplementary measures considering market volatility and investor protection, but no final decisions have been made."
* This article has been translated by AI.
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