Domestic stock market volatility has been rapidly decreasing recently. The average volatility of the KOSPI has fallen to around 1% in September, while the number of instances triggering the volatility interruption mechanism (VI) and the excess disclosures indicating price distortions in exchange-traded funds (ETFs) have also decreased. This trend indicates a shift away from sharp fluctuations in both the index and individual stocks, as well as in the ETF market.
According to the Korea Exchange on September 14, the KOSPI's average monthly volatility recorded ±1.80% as of September 14. This marks a decline from 2.47% in August and is less than half of the 4.89% recorded in July.
The number of VI triggers, which indicate sharp price fluctuations in individual stocks, has also shown a clear downward trend. The total number of VI triggers for the KOSPI and KOSDAQ from September 1 to September 14 stands at 4,062. This is about 40% of the total 10,115 instances recorded in August, and if this trend continues, the total for September is expected to fall below 10,000. Previously, the number of VI triggers soared to 22,060 in July and reached 21,257 in June, indicating a period of high volatility.
Price distortions in the ETF market are also decreasing. There have been 83 excess disclosures of ETF price distortions in September, a significant drop from 507 in August and a larger decrease compared to 864 in July and 1,299 in June. The distortion rate refers to the difference between the market price of an ETF and its net asset value (NAV). Increased market volatility can make it difficult for liquidity providers (LPs) to offer buy and sell quotes that reflect market conditions, leading to greater discrepancies between market prices and actual values.
The reduction in ETF distortion disclosures is particularly significant as it indicates increased price stability in the market. ETFs are influenced not only by the prices of underlying assets but also by supply and demand and trading volume. When market volatility is high, the gap between actual value and market price can widen. However, as volatility decreases, the likelihood of such price distortions diminishes.
The strengthening of distortion rate management by financial authorities is also believed to have had an impact. The Financial Services Commission has tightened the management obligations for distortion rates of ETFs and exchange-traded notes (ETNs) since August 19, lowering the thresholds from 3% domestically and 6% internationally to 2% and 5%, respectively. As market volatility has decreased and LP management standards have been tightened, the stability of ETF prices has improved.
A financial industry official stated, "Recently, as market volatility has significantly decreased, instances of sudden expansions in ETF distortion rates have also diminished. From the LP's perspective, it has become much more stable to offer quotes that align with market prices and manage them effectively."
* This article has been translated by AI.
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