Korea Exchange (KRX) is considering widening its registration process to avoid problems arising from algorithmic trading.
KRX has raised the subject of negative market impacts generated by algorithmic trading errors and to establish a plan to secure the safety of the derivatives market. A consultation phase has now begun and KRX is gathering comments.
Currently, it is only mandatory to register the market making accounts of members and customer margin accounts with KRX.
The exchange now suggests participants should register algorithmic trading accounts. It says that given the absence of information, it is nearly impossible to perform real-time monitoring on every single automated transaction.
KRX believes that can be improved if members submit accounts information because, within the range of registered algorithmic trading accounts, KRX will be able to supervise all transaction records to detect signs of abnormal orders through the monitoring system.
KRX proposes tackling the issue of excessive order placement via a combination of restrictions and surcharges.
Currently, a large number of orders from algorithmic trading flow continuously through the exchange derivatives system, generating a large number of unmatched orders.
KRX say it is fair that members trading frequently should pay more for maintenance of their systems. It suggests a surcharge on accounts that generate excessive orders for KOSPI 200 futures/options. KRX also suggests refusing to accept excessive orders (not quantified yet), that could cause glitches or crashes in the exchange’s systems.
There are limits to order sizes now, but irregular duplications can occur. KRX wants to find a way to control this by setting a cumulative order quantity size and an automated order cancellation system. KRX proposes putting in place a ‘Kill Switch’ so users can delete such orders. Currently, that mechanism does not exist.