Nextrade, South Korea's alternative trading system, has effectively abandoned its plan to begin trading exchange-traded funds in November. The Korea Exchange decided to exclude ETFs and exchange-traded notes from after-market trading, disrupting Nextrade's timeline.
ETF trading through Nextrade's pre-market and after-market sessions is now expected to become possible in 2027 or later, according to financial investment industry sources on the 2nd. Nextrade had originally planned to conduct system tests immediately after the Korea Exchange extends its trading hours on the 14th, then file for final approval from financial regulators this month to trade ETFs. Preparations for market entry were well advanced, with technology development and discussions on trading methods largely complete.
The plan stalled when the Korea Exchange decided to exclude ETFs and ETNs from after-market trading. The exchange had intended to allow trading of exchange-traded products including ETFs during the after-market session but withdrew the plan as controversy grew over volatility in single-stock leveraged ETFs and inverse ETFs. Asset managers and brokerages also expressed concerns about price management and liquidity provider operations tied to overnight ETF trading, sources said.
The exchange's decision does not impose any regulatory restriction on ETF trading at Nextrade. But if Nextrade opens the market first while the Korea Exchange does not handle ETFs in its after-market session, the burden on market participants would inevitably increase, because designating brokerage liquidity providers, managing overnight prices, and arranging computer networks and settlement systems would all have to be coordinated separately. An official at Nextrade said the company will reset its timeline after watching market conditions and whether the Korea Exchange later extends ETF trading hours.
Nextrade has gained some near-term relief as the deferral of trading volume caps was extended by another year. Late last month, financial regulators sent Nextrade a no-action letter granting a one-year extension of the deferral. The previous no-action letter expires on the 2nd, with the deferral applying again for one year starting on the 3rd.
Under the current Financial Investment Services and Capital Markets Act, an alternative trading system's total trading volume cannot exceed 15% of the entire market, and volume in an individual stock cannot exceed 30% of the Korea Exchange's. The conditions for this extension are unchanged. Nextrade must stay within the 15% cap on total volume while keeping volume in each stock below 100% of the Korea Exchange's regular session and limiting the number of tradable stocks to 700 or fewer.
The delay in the Korea Exchange's plan to launch a pre-market session also factored into the extension. Once the exchange opens a pre-market session, orders will be dispersed, reducing Nextrade's burden in managing trading volume. Financial regulators are seen as having concluded that a further deferral is needed until such changes to market infrastructure are in place.
