Market Revival Expected
The government will expand the stock price limit to ±30 percent starting from January next year, which could increase stock trade volume.
Some point out that an increase in the participation of individual investors will only raise the volatility of small and medium capitalization stocks.
According to Korea Exchange (KRX) and sources in the financial investment industry on August 13, the average daily transaction amount and trade volume of securities radically jumped during 1998 and 1999. In 1998, the average daily transaction amount was 6.6042 trillion won (US$6.4723 billion), but this increased by 421.18 percent to 34.8162 trillion won (US$34.1105 billion) a year after. The average daily trading volume also surged from 97.716 million shares in 1998 to 278.55 million shares in 1999, a 185.06 percent growth.
During this period, the price limit of securities was expanded from ±12 percent to ±15 percent.
Securities professionals are expecting the same effect from a price limit expansion this time as well. Seo Bo-ik, a researcher at Eugene Investment and Securities, said, “After the price limit expansion, stock transaction amount has been increased both short term and long term. This has been proven from past experiences.”
This will be the fourth price limit expansion. In April 1995, a price limit of ±6 percent first started, and this was gradually increased to ±8 percent in November 1996, ±12 percent in March 1997, and ±15 percent in December 1998. The trade volume dramatically increased during 1998 and 1999 of course, but upward trends in the stock trade volume also appeared in previous expansions.
Kim Ko-eun, a researcher at IM Investments and Securities, explained, “After the new system was stabilized, the maximum volatility and turnover ratio in the stock market was realized from 1998 to 2002. Volatility expansion was structurally possible, and accordingly, individual trading increased, which ultimately led to enhanced volatility and turnover ratio.”
If the transaction amount in the stock market rises, Korean securities companies are expected to benefit.
As of the end of 2013, the consignment commission of ten major securities companies in Korea still accounts for 62.43 percent of all commission profits.
Likewise, if the transaction amount decreases, the profits of those companies shrink. The problem is that the transaction amount in the stock market has constantly dropped since 2011.
In fact, the securities trading volume reached 6.8631 trillion won (US$6.7261 billion) in 2011, but this shrank to 4.8236 trillion won (US$4.7273 billion) in 2012, and radically dropped to 3.9934 trillion won (US$3.9137 billion) in 2013. After all, 62 securities firms in Korea recorded a net loss of 109.8 billion won (US$107.6 million), for the first time since 2002. The average daily transaction amount this year is 3.8068 trillion won (US$3.7308 billion), almost half of 2011.
Some claim that a price limit expansion would not directly lead to an increase in transaction amount yet. Seo Myung-chan, a researcher at Kiwoom Securities, said, “Although the price limit expansion will increase trading volume, small and medium stocks which have higher volatility will be influenced a lot relative to large capital stocks. Effects on the entire stock market could be much less than expected.”