2010+Intro Trading KRX Stock Markets (1)

8/6/2019 2010+Intro Trading KRX Stock Markets (1)

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Korea Exchange (KRX) is the main (and sole) operator of securities markets and

derivatives market in Korea under the newly enacted Financial Investment

Services and Capital Markets Act (FSCMA). With its responsibility to uphold

market integrity, KRX endeavors to provide the most efficient, fair and reliable

marketplaces for all participants ranging from domestic individual investors to

international institutions.

To this end, KRX is not hesitant to the change and progress toward better market

developments and therefore continues to move forward by introducing advanced

market system and infrastructures. Although such ongoing efforts would benefit

our customers and the industry, we also understand that frequent changes in rules

& regulations may bring unintended complexity in our market environment.

Therefore, it is also important for us to provide uptodate information materials for

our customers to better understand the changes.

This publication specifically focuses on rules and regulations relevant to trading

of listed stocks (equities & KDRs) in KRX Markets. And this English version of

the publication is prepared to support our global customers who now accounts fornearly 30% of total market capitalization. We would like to acknowledge that

information in this booklet may not be complete and comprehensive enough to

cover all areas of market participants interests. However, we do believe that this

material is helpful in providing general information about the trading environment

in KRX Stock Markets.

We hope you find this booklet useful.

May, 2010

Korea Exchange


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General Overview

1. Introduction to KRX Stock Markets

2. Regulations related to Trading and

Order Entrustment

3. Basic Trading Procedures

4. Electronic Trading Systems


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1. Introduction to KRX Stock Markets

A. Market Overview

Koreas Capital Market has experienced exponential growth since the launch of first

national stock market, Daehan Stock Exchange, back in 1956. Having started with

only 12 listed companies, the market now offers 1,960 listed equity issues with total

market capitalization of 965 trillion KRW by the end of year 2009. According to the

World Federation of Exchanges (WFE), Koreas Stock Market1) is ranked at 17th interms of market capitalization and 8th in terms of trading volume among member

exchanges.

In addition, since the opening up of the market to foreign (nonresident) investors in

1992, foreigners have shown continuous interest in purchasing Korean stocks. They now

account for nearly 30% of market capitalization in the KOSPI Market.

B. Statutory Structure of Korean Securities Markets

Having consolidated 4 different market operating organizations back in 2005, Korea

Exchange (hereinafter KRX) is now the main operator of Koreas Securities Markets2)

and Derivatives Market under the newly enacted Financial Investment Services and

Capital Markets Act (hereinafter the FSCMA). The FSCMA is governed by

Financial Services Commission (hereinafter FSC) and its regulatory enforcement is im-

plemented by Financial Supervisory Services (hereinafter FSS).

1) Both KOSPI Market & KOSDAQ Market combined.

2) The FSCMA defines Securities Markets as marketplaces provided by KRX to trade listed securities

including debtsecurities, equitysecurities, beneficiary certificates, investment contract securities,

derivativescombined securities, and securities depository receipts. This booklet focuses on Stock

Markets which includes equitysecurities & depository receipts. Please note that trading mechanism

covered in this booklet may not always be applied to debtsecurities, derivativescombined securities,

beneficiary certificates, and investment contract securities.

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The Financial Services and Capital Markets Act (FSCMA) was legislated in August 2007

and went into effect on February 4, 2009. Main purpose of the ACT is to support so called

Big Bang in Koreas capital market industry and to strengthen the industrys competitive

edge in the global market.

The FSCMA consolidated 6 existing laws* and partially adopted 9 existing laws that were

relevant to the capital market and financial industry in Korea (excluding the Banking Act and

Insurance Business Act).

* includes the Securities Exchange Act, Futures Trading Act, Indirect Investment Act,

Merchant Banks Act, Trust Business Act, Korea Securities & Futures Exchange Act.

Newly enacted FSCMA

Within this legal framework, KRX operates 2 Securities Markets; KOSPI market as a

main board and KOSDAQ market as a venue to small and medium sized enterprises.

Trading and clearing services are provided through KRX Systems which are assisted

by Korea Securities Computer Corporation (hereinafter KOSCOM) and Korea

Securities Depository (hereinafter KSD) for backoffice operations.

Structure of Korean Capital Market


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C. Listed Securities on KRX Markets

At KRX Securities Markets, following types of listed securities are available for

trading.

i. Stocks, including Equities and Korea Depository Receipts (hereinafter KDRs);

ii. Exchange Traded Funds (hereinafter ETFs);

iii. Certificate of Subscription Rights3);

iv. Subscription Warrants4);

v. Equity Linked Warrants (hereinafter ELWs);

vi Beneficiary Certificates; and

vii. Debt Securities, including Government Bonds and Corporate Bonds.

2. Regulations related to Trading and Order Entrustment

A. Relevant Rules & Regulations

In Securities Markets, where a variety of investment products change hands every-

day, it is necessary to have a standardized system to ensure orderly and fair trans-

actions for all market participants. Accordingly, in Korea, article 393 of the FSCMA

states that the rules and regulations pertaining to trading in Securities Markets shall

be established by the Business Regulations of KRX.

The FSCMA (412) also states that establishment or amendment of KRX Business

Regulations shall be subject to approval of FSC. Currently, as an official market op-erator in Korea, KRX has established KOSPI Market Business Regulation and

KOSDAQ Market Business Regulation for respective markets. And, each Business

Regulations have the Enforcement Rules to stipulate specific conditions of the

regulations.

3) Rights to subscribe for new shares which are to be issued by the company for additional capital

increase

4) Warrant, separated from Bond with Warrants (BWs), having exercisable rights for issuance of new

shares.

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The FSCMA also delegates specific enforcement regulations to FSC which has estab-

lished Regulation on Financial Investment Business, Regulation on Securities

Issuance and Disclosure, and etc. for such matters.

B. KRX Business Regulations

KRX Business Regulations stipulate rules & regulations on 4 major areas of concerns;

1) order entrustment, 2) trade executions, 3) market operations, and 4) clearing &

settlement.

i. Order Entrustment rules cover methods and procedures that securities compa-

nies5) (with KRX Membership) have to comply with when conducting cus-

tomer brokerage businesses. Such methods and procedures include opening

accounts, receiving entrustment of orders, requirements on margining

(collecting good faith deposits), brokerage commissions, and etc.

ii. Trade Execution rules cover methods and procedures of trading in the market.

Such matters include trading hours, trading days, execution methods, and etc.

iii. Market Operation rules cover matters relevant to ensuring fair price discovery

in the market. Such matters include trading halts, shortselling regulations,

price adjustment on exdividend date and etc.

iv. Clearing and Settlement rules cover methods and procedures of post trading

process. These rules cover areas such as, but not limited to, handling of settle-

ment failures, payment of settlement cash, and delivery of securities.

5) Registered companies with the license for Investment Brokerage Business or Investment Dealing

Business, authorized by FSC, shall have corporate title of either Securities Companies or Financial

Investment Businesses according to the FSCMA. Before the FSCMA, or under (now repealed)

Securities Exchange ACT, these licensed companies were titled as Securities Companies and most of

them still maintain the title as of today.


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3. Basic Trading Procedures

A. Opening Accounts and Placing Orders

In order to trade in KRX Stock Markets, every investor has to first open a trading ac-

count at a securities company that has obtained KRX Membership6) (hereinafter

Members). Investors are to place (or submit) their trading orders through the

Members which act as agents in the market. Immediately after receiving customer or-

ders, Members have to submit corresponding Quotations7) to KRX markets on the ba-sis of time priority.

Foreigners (non residents) need to obtain registered Investors Registration

Certificate (IRC) from FSS before opening a trading account. Foreigners may ap-

point a Standing Proxy who would conduct these processes on their behalf.

B. Trade Executions and Notifications

KRX Trading System matches and executes received Quotations according to the

predetermined auction principles, and then immediately notifies the results of trade

executions to concerned Members. Members, in turn, notify their customers of the

trading results.

C. Settlement

Based on the results of trade executions, customers must make the payment for pur-

chased securities or deliver the securities sold to relevant Members by the settlement

deadline set by the respective Members. Mostly, transfer of cash or securities in cus-tomers trading accounts is processed by the Members.

6) Licensed Securities Companies (or Financial Investment Business Entities) has to receive

Membership from KRX to directly participate in KRX Stock Markets. The companies with no KRX

Membership have to entrust their customer (or proprietary) orders to KRX Members for transactions

in the market. Membership requirements are stipulated under theKRX Membership Regulation.

7) KRX Business Regulations simply define Orders as customers expression of intentions to buy (bid)

or sell (ask) certain securities and Quotations as the Members expression of intentions to carry out

the trade (either proprietary or customers) under its name.

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For the final settlement process, Members8) will make payments for purchased

amount and deliver securities sold to KRX which, in turn, makes the payment and de-

livery to its counter parties (Recipient Members).

Trading Flow at KRX Stock Markets

4. Electronic Trading Systems

A. Member Systems

Member Systems (systems developed and operated by Members) perform the func-

tions relating to customer businesses which include the account management, order

routing, management of securities inventory, notification of transactions, and etc.

Members began developing and operating their own inhouse systems from

November 1996. However, some Members continue to outsource the system and its

operation from KOSCOM which offers the PowerBase System9).

8) In this case, Clearing Members. Almost all KRX Members have license to both Trading and

Clearing.

9) KOSCOM has newly developed the PowerBase System in February 2007 to replace existing Base21

system.


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B. KRX Systems

KRX Trading System performs full range of functions required for securities trans-

actions such as receiving quotations, trade executions, notification of trade results,

calculation of daily settlement data, and etc.

Market Information System generates and disseminates various market data includ-

ing prices, quotations, and market indices to be used as investment references.

On March 23rd 2009, KRX has launched new trading system (EXTURE) which is to

become core infrastructure in Korea securities market industry. EXTURE was developed to

consolidate independent market platforms (for KOSPI market, KOSDAQ market,

Derivatives market) into one single platform and to upgrade the system capacity by adopting

cuttingedge technologies.

Specifically, EXTURE has the capacity to process up to 40 million quotations per day

(twice the capacity of former system) and average transaction turnaround time is less than

8/100 of a second. Overall, the new system has substantially improved the efficiency of

trading in KRX markets.

KRX Launches Next Generation Trading System (EXTURE)

There are many other electronic systems to perform everyday market operations;

including KIND (managed by KRX) to provide corporate disclosure information,

Foreign Investor Management System (managed by FSS) to assist regulation on

foreigners shareholding limitations for certain stocks, Market Surveillance System

(managed by KRX) to monitor any illegal and irregular trading activities, and

Depository and Settlement System (managed by KSD).

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Entrustment of Trading Orders

1. Trading Accounts

2. Receiving Entrustment of Orders

3. Rejecting Entrustment of Orders

4. Margin Deposits

5. Members Brokerage Commission


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1. Trading Accounts

(1) Background

When intending to receive and process the trading orders entrusted by a customer, the

concerned Member must open a trading account for the customer in advance. (77

KOSPI / 33 KOSDAQ)*.

* Hereinafter, # KOSPI refers to article # of KOSPI Market Business Regulation, and #

KOSDAQ refers to article # of KOSDAQ Market Business Regulation.

Opening of trading account implies that both the Member and its customer have

agreed upon certain service conditions and that customers orders will be entrusted

and processed in accordance with the conditions stipulated in the agreement.

By having entrustment service conditions in written document, it prevents potential

disputes that may arise between the Member and its customers. It also protects the in-

vestors by allowing them to be aware of the service conditions before entrusting their

trading orders.

(2) Account Opening Procedures

A. Principle of Suitability (46 of the FSCMA)

Securities companies are required to obtain information about the customers status

pertinent to financial investment activities and decide on which investment products

are appropriate for that particular customer before opening an account or making anyinvestment recommendations. This requirement applies retroactively to accounts es-

tablished before the effective date of the FSCMA.

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Before the FSCMA, investor protection policy was based on principle of Your Own

Responsibility under the abolished Securities Exchange Act. However, because the modern

capital markets have become highly complicated due to financial globalization, asset securiti-

zation, and development of financial engineering, it is difficult for every investors to fully un-

derstand the products and make appropriate investment decisions. Thus, the FSCMA adopts

Principal of Know-Your-Customer to reinforce brokers investor protection responsibilities.

Restrictions on Investment Recommendations under the FSCMA

In specific, Securities Companies need to classify its customers into Professional

Investors and Ordinary Investors10) based on the customers financial status and

level of knowledge on financial investment products. In case of Ordinary Investors,

before opening an account, Securities Companies are required to conduct a survey or

an interview to obtain the customers information such as investment purpose, finan-

cial status, and investment experiences. After having the customer to confirm the in-

formation by signing the written statement (or by having any other method of au-

thentic approval), Securities Companies have to keep and maintain the confirmed in-

formation in the form of document, voice recording, or any other electronic methods.

When intending to provide investment recommendations to Ordinary Investors,

Securities Companies must recommend the products appropriate for that particular

customer.

B. Agreement on Trading Accounts (77 KOSPI / 33 KOSDAQ)

To open a trading account, the Member must enter into an Agreement on Trading

Account with the customer. Among others, the Agreement must stipulate following

matters stating that;

i. This trading account is opened for the purpose of the Member and the custom-

er to trade in the Securities Markets established by KRX; and

ii. The customer consents to the Agreement on Customer Trading Servicespre-

pared by the Member.

10) Defined under article 46 of the FSCMA


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In addition, when opening an account, Members are required to keep and maintain

the necessary customer information such as the name, address, and resident identi-

fication number. This information shall be confirmed (with an authentic signature) by

the customer at the time of account opening.

C. Agreement on Customer Trading Services (78 KOSPI / 34 KOSDAQ)

The Agreement on Customer Trading Services is a standardized agreement that is

to be signed by the customer when opening a trading account. This Agreement isstandardized because it is difficult for Members to prepare individual service agree-

ment for each customer.

KRX Business Regulations require the Agreement to clearly state following matters;

i. The Member and the customer shall be compliant to relevant laws, enforce-

ment decrees, KRX business regulations, and etc.;

ii. Conditions on priority of customer orders received before opening of KRX

quotation receiving hours11);

iii. Conditions on Members right to reject customer orders and Members right to

collect good faith deposits (also known as margin) and brokerage commission;

iv. Restrictions on Members arbitrary trading of customers account; and

v. Actions to be taken in case of settlement failures.

Nonetheless, Members may add any other service conditions provided that the con-

ditions do not contradict relevant laws and regulations.

Additionally, Members are required to explain the important conditions of the

Agreement to the customers at the time of account opening. When establishing new

service Agreement or amending the existing ones, the concerned Member shall notify

the details to KRX within 5 days after its effective date.

11) See III1(1) on Trading Hours

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2. Receiving Entrustment of Orders (109 ER KOSPI / 41 ER KOSDAQ)*

* Hereinafter, ER refers to Enforcement Rules of respective Business Regulations

(1) Receiving Orders in Written Document Forms

Members may receive entrustment of orders through an order slip (written order

form) which shall be written and signed (or imprinted his/her seal, hereinafter the

same) by the customer.

(2) Receiving Orders over Telephone, Facsimile, etc.

When Members are receiving orders over telephone, facsimile, and etc., the employee

whos receiving the order (hereinafter Recipient) must confirm that the person en-

trusting the order is the customer himself/herself. After the confirmation, the Recipient

has to write up an order slip based on customers instruction and sign the slip thereon.

The Recipient shall keep and maintain the customers order instructions (by voice re-

cording, FAX copies, etc.) as a proof of order entrustment for a specified period. Instead

of writingup of order slips, the Recipient may input trading orders in electronic method

with an authentic electronic signature thereon. In this case, the Recipient may keep and

maintain the record in a separate form and may not print the copies of order slips.

(3) Receiving Orders through Electronic Communication Network

When Member are receiving the entrustment of orders through electronic communi-

cation network such as Home Trading System (HTS), Mobile Trading System (MTS),

and Internet Websites, the Member and the customer must enter into an Agreement

on Order Entrustment through Electronic Communication Network in advance.

Online trading systems offered by Members shall be reasonably designed to accom-

modate safe financial transactions. The system shall be capable of, but not limited to,

performing functions such as verification of customers identity and monitoring of

trading records by the customer.


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After having introduced the fully automated electronic trading system in 1997, KRX also

adopted Home Trading entrustment method to provide investors with complete online trading

environment. It enabled investors and Members to enjoy increased efficiency and cost

reduction in the market by conducting entire trading process (order routing, members

quotation submission, matching at KRX, notification of trade results, and etc.) in automated

format. To use this mechanism, investors need to simply download Members Home Trading

System (HTS) on to their home PCs.

Introduction of Home Trading (Apr. 1st 1997)

3. Rejecting Entrustment of Orders (84 KOSPI / 40 KOSDAQ)

Members have the responsibility to maintain fair and orderly trading environment

and protect bona fide investors. Thus, they are required to reject customer orders that

are contradicting to such responsibility. Specifically, Members must, but not limited

to, reject;

i. orders that breach or has the potential to breach the FSCMA provisions such asReturn of Insiders Short Swing Profits (172), Restriction on Use of Material

Non public Information (174), Restriction on Market Price Manipulation

(176), and Restriction on Unfair Trading (178); and

ii. orders in breach of shortselling regulations (including the uptick rule).

In case of a customer having unsettled balance in the account, Members, based on the

conditions stipulated in relevant agreements, may reject new orders and restrict with-

drawal of cash or securities from that particular customers account.

4. Margin Deposits (87 KOSPI / 42 KOSDAQ)

Margin (also referred to as good faith deposits) is cash or securities that customers are

required to deposit to Members when entrusting orders. Members would use the mar-

gin deposit as a collateral to the customers settlement obligation.

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(1) SelfRegulation on Margin PolicyIn the past, the Exchanges12) determined minimum rate of margin that Members had

to collect from their customers. However, since the amendment of regulations on

April 1st

1998, Members have established their own margin policies. This selfregu-

latory approach has enabled Members to apply flexible risk management system.

Most Members today require customers to deposit 40% of securities value for bid or-

ders and entire securities sold for ask orders.

Members Margin Policy Before and After the Regulatory Change (Apr. 1998)

Before After

Margin RateCollect 40% of purchasing

value at minimumBased on Members own policy

Substitute SecuritiesShall be limited to less than

20% of purchasing value

Exempt Institutions Designated by KRX Based on Members discretion

Administrative IssuesCollect 100% of purchasing

valueBased on Members own policy

Substitute Securities

& Value

Exchange designates

eligible securities and

applicable value

Members may determine the

value of securities within the

range provided by the Exchange.

(Since Oct. 2006)

(2) Substitute Securities(88 KOSPI / 43 KOSDAQ)

To enhance the utility of investors securities inventory, KRX allows certain securities,

instead of cash, to be used for margin deposits. So called Substitute Securities, des-

ignated by KRX, can also be used as guarantee payments and collateral for various

credit transactions. (171 of the FSCMA; 425 of Regulations on Financial Investment

Business)

12) Before the consolidation in January 2005, there were 3 exchanges (KSE, KOSDAQ, KOFEX) and 1

selfregulatory institution (KOSDAQ Committee).


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(3) Special Margin Collection Rule (89 KOSPI / 42 KOSDAQ)

A. Background

Although regulation on Members Margin Policy has been waived to facilitate self

regulatory environment, Members have an exceptional obligation to collect 100% margin

from those customers who have failed to meet the balance on the settlement date.

Previously, this special margin collection rule was applied only to those who have

breached the shortselling regulations and those who have failed to deliver sold secur-

ities by the settlement deadline. However, prompted by the high expectations on

strong market performance, there were rapid increase in customers Balance

Failures* which have raised concerns on market instabilities. Thus, on May 1st

2007,

KRX has adopted this special rule to minimize the potential market instability caused

by overspeculative trading activities.

In KRX stock markets, Members have to complete the settlement with KRX 2 days after the

transaction (T+2). This timeline is also effective to investors settlement obligation for their

transactions with Members.

Balance Failure occurs when an investor fails to pay the purchased amount or deliver the

sold securities to the Member whom the investor entrusted his/her orders to. In such cases, the

Member would complete the settlement with KRX on behalf of the customer to prevent the

settlement failure. If the investor continues to lack in balance on T+3, the Member may sell the

purchased securities at its own discretion.

T T+1 T+2 T+3

Equity Purchased

at 40% marginBalance Failure

by lack of cash in theaccount

(60% of purchased amount)

Forced Sale bythe Member

in case the investor

continues to lack

in blance

Understanding of Balance Failures


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B. Rule Application

When a customer fails to pay purchased amount by the settlement date (Balance Failure),

the Member has to freeze the customers account against the margin trading for next 30

days. The account freeze here means that the Member has to collect 100% of purchased

amount or 100% of sold securities (i.e. no margin trading) when receiving orders

from that particular customer. When the account freeze is triggered by failure to deliver

the sold securities, the Member has to freeze the customers account for next 90 days.

To prevent or eliminate any regulatory loopholes, all Members shall apply this spe-

cial margin collection rule to the customers account when;

i. the customer sells the purchased securities before the settlement date (T+2)

and fails to meet the payment balance on T+2;

ii. information regarding customers balance failure is registered at Individual

Credit Information Agencies16) relevant to financial investment businesses by

other Members (thus all Members shall freeze the account pertinent to that

particular investor); and

iii. there was balance failure for transactions carried out in other securities market

(i.e. the rule shall be applied regardless of KOSPI Market or KOSDAQ Market)

However, exceptions to this Rule shall be applied when;

i. amount of balance failure is less than 100,000KRW on the settlement date; and

ii. payment or delivery is delayed by causes such as natural disaster, state of

emergency, network failure, Member's mistakes or when the Member ac-

knowledges that there was no malicious intentions or gross negligence fromthe concerned customer.

16) Currently, KOFIA (Korea Financial Investment Association) is a registered Credit Agency and takes

the role of handling information on customers balance failures.

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Trading in KRX Stock Markets

1. Market Operations

2. Trade Executions

3. Market Management

4. Special Cases of Trade Executions

5. Alternative Trading Methods

6. Liquidity Providers


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i. Holidays according to the Regulation on Government Holidays (which in-

cludes Sundays, National Election days, etc)

ii. Labor Day (May 1st)

iii. Saturdays

iv. December 31st

(when it's a holiday, immediately preceding business day)

v. when KRX deems market closure is necessary due to extreme market conditions.

Last day of the year (Dec. 31st) is closed to allow the market industry to conduct nec-

essary end of year business processes such as market actions (exdividends, and ex

rights) and IT system inspections. Before 2001, markets were closed for more than 3

days at the end of the year due to cumbersome process such as registration of share-

holders name for bookclosure.

(3) Trading Unit (33 ER KOSPI / 18 ER KOSDAQ)

Trading unit (also known as the Trading Lot) is the acceptable quantity for trading of

securities in the exchange market. Smaller trading unit may enhance investors trad-

ing convenience, but, on the other hand, it may increase the traffic in the system caus-

ing transaction delays. Large trading unit will have just the opposite impact in the

market. Thus, it is important for the Exchange to establish optimal trading unit taking

into account of both convenience and efficiency of market participants.

Trading Units for listed securities on KRX markets are shown in the table below.

Trading Unit

KOSPI KOSDAQ

Stocks10 (1, if the base price is higher than

50,000 KRW)1

Korea Depository Receipts (KDRs) 10 1

Exchange Traded Funds (ETFs) 1 1

Equity Linked Warrants (ELWs) 10

Subscription Warrants 1 1

Certificate of Subscription Rights 1 1

Beneficiary Certificates 10 1


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During the offhours session (available for stocks, KDRs, ETFs), trading unit shall be

1 regardless of the security types and the prices. KRX may change trading units when

deemed necessary due to certain market conditions such as sudden surge of quotation

traffic in the market.

(4) Tick Size (32 ER KOSPI / 18 ER KOSDAQ)

Tick Size is the smallest price increments available in the market. Based on similar

reasoning as the trading unit, KRX establishes the optimal tick size taking into ac-count of efficiency and convenience of market participants. Wider tick size benefits

investors with faster transactions (by having less burden on the system), but it also in-

creases the spread (limiting the number of prices that investors can choose) causing

additional transaction cost. Narrower tick size will have just the opposite effects.

At KRX securities markets, different tick sizes are applied taking into account the

price of securities (as shown in the table below).

Price of Securities (in KRW) Tick Size (in KRW)

KOSPI Market KOSDAQ Market

5,000 or higher

10,000 or higher

50,000 or higher

100,000 or higher

500,000 or higher

less than 5,000

less than 10,000

less than 50,000

less than 100,000

less than 500,000

5

10

50

100

500

1,000

5

10

50

100

100

100

* To minimize the tracking errors, tick size of 5KRW is applied to all ETFs regardless of the price

(effective since July 2005 for KOSPI Market and August 2004 for KOSDAQ Market).

(5) Types of Orders (Quotations) (2 KOSPI / 2, 372 ER KOSDAQ)KRX Business Regulations define Orders as expression of customers intentions to

buy (bid) or sell (ask) a security and Quotations as the expression of Members in-

tentions to carry out the trade (either proprietary or customers) under its name. There

are different types of orders that customers can place through KRX Members

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(brokers). These types of orders are same in that customer specifies the issues and

quantity to be traded, but different in terms of price conditions. Following types of or-

ders are available at KRX stock markets.

Limit Order, which is the most commonly used type of order, is an intention to

trade at the price (or at better price if available) specified by the investor. Thus,

bid limit orders will be executed only at (or at prices lower than) the price

specified by the investor. On the other hand, ask limit orders will be executed

only at (or at prices higher than) the price specified by the investor.

e.g.) A bid limit order of 10,000KRW is traded at 10,000KRW or lower, and an ask limit

order of 10,000KRW is traded at 10,000KRW or higher.

Limit orders are useful to investors in that orders will not be traded at un-

favorable prices than the price specified. However, its disadvantage is the pos-

sibility of not being traded at all if there are no counter orders that meet the

specified price conditions.

It should be noted that investors can only place limit orders for subscription

warrants, certificate of subscription rights, ELWs, and beneficiary certificates.

Market Order17)is an intention to trade immediately at the best price available

in the market. Thus, investors will specify the issue and quantity but not the

price. Since it has no price conditions, market order is advantageous in that it

can be traded immediately (if there are available counter orders) at the time of

placing the order.

However, it poses the risk of extreme price fluctuations in case when there is

concentration of one sided (bid or ask) market orders with insufficient orders

on the other side. Therefore, the market order can not be used for trading secur-

ities which are not subject to the daily price limitations18) or securities which

have lack of liquidity. Those types of securities are; Subscription Warrants,

Certificate of Subscription Rights, ELWs, and Debt Securities.

17) Introduced on Nov 25th

1996 for KOSPI Market and on Jul 1st

2002 for KOSDAQ Market

18) See III1(6) for description on Daily Price Limitations


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LimittoMarketonClose Order19) (hereinafter LMC Order) is an order thatparticipates in the market as a limit order during the regular session, but has the

condition to convert remaining quantity of the order to a market order at 14:50

when the quotation receiving hours begins for the market closing call auction20).

LMC order type complements the drawbacks of limit order by enhancing the

possibility of the order being traded during the day while maintaining the bene-

fits of limit orders throughout the regular session. LMC order can not be placed

with the prices at upper bound or lower bound of daily price limitations.

Immediately Executable Limit Order21) is a limit order having condition to des-

ignate the limit price at the best available price on the counter side, thus allow-

ing the order to be executed immediately yet limiting the tradeable price.

For instance, in case of an immediately executable limit order to sell a security,

the highest bid price at the time the order is received by KRX will be the speci-

fied limit price of that immediately executable limit order. And vice versa for

bid orders.

Best Limit Order22) is a limit order having condition to designate the limit price

at the best available price of the same side orders.

For instance, in case of a best limit order to sell a security, the lowest ask price

at the time the order is received by KRX will be the specified limit price. And

vice versa for bid orders.

Target Price Order23) is an order specifying the intention to trade at (or close to)

the target price such as the Volume Weighted Average Price (hereinafter

VWAP). The Member, whom the order is entrusted to, will split the target

order into fractions and submit the quotations for each fraction throughout the

trading session to meet the target price. In this case, since there is no Target

19) Introduced on Nov 25th

1996 for KOSPI Market and on Oct 24th


20) See III2(2)(a) for description on Call Auction.

21) Introduced on Jan 26th

2001 for KOSPI Market and on July 26th


22) Introduced on Jan 26th

2001 for KOSPI Market and on July 26th


23) Introduced on May 30th

2005

32/33


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Price Quotations, Members will submit numerous Limit Quotations or Market

Quotations.

Places Target Price Order(at VWAP)

Customers(investors)

Members KRX

Places Limit Quotations orMarket Quotations

Target Price Order and Quotation

Investors can attach any one of following 2 conditions on Limit Orders, Market

Orders, and Immediately Executable Limit Orders to carry out diverse trading strategies.

IOC (Immediate or Cancel): The order shall be executed immediately based on the

availability of orders on the counter side and cancel, immediately, all remaining

quantity of the order at the time it is received by KRX (entered into the orderbook).

FOK (Fill or Kill): The order shall be executed immediately in full quantity based on

the availability of orders on the counter side at the time it is received by KRX and

cancel, immediately, of the order if entire quantity can not be traded.

Above conditions can not be attached to LMC Orders and Best Limit Orders.

Special order conditions (IOC & FOK)

(6) Daily Price Limitations

A. Introduction

Daily Price Limitation is a set of upper bound and lower bound to which the price of

listed securities can move in a day. Thus, investors or Members can not place orders

or quotations exceeding the upper or lower price limitations. KRX adopts the daily

price limitation system to facilitate fair market price discovery and to protect invest-

ors from sudden price fluctuations.

B. Rule Application (20 KOSPI / 14 KOSDAQ)

KRX imposes daily price limitations of 15%. On each day 15% shall be multiplied


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to the baseprice of the issue and such amount is added to the baseprice for an upper

price limit and subtracted from the baseprice for a lower price limit. Any residual

amounts not pertaining to the tick size is disregarded so that all price limits are set at

available tick sizes.

Daily price limitations are not applied to ELWs, Certificate of Subscription Rights,

Subscription Warrants, and issues under liquidation trading. KRX has recently

amended the regulation (effective as of May 10th

2010) to allow Leveraged ETFs24) to

have daily price limitations of 15% multiplied by its tracking ratio (i.e. a product withthe tracking ratio of 2X will be applied with 30% limitations).

Date KOSPI Market Date KOSDAQ Market

Before

Apr. 1995

Fixed Amount

(based on price

of the issue)

4.6%

on average

Before

Nov. 1996

Fixed Amount

(based on price

of the issue)

5.4%

on average

Apr 1st

1995

Fixed Rate

Basis

6%Nov 1

st1996

Fixed Rate

Basis

8%Nov 25

th

1996 8%

Mar 2nd

1998 12% May 25th

1998 15%

Dec 7th

1998 15% Mar 28th

2005 15%

History of Daily Price Limitations

(7) BasepriceBaseprice is used as the basis for determining the price limitations of stocks, ETFs,

beneficiary certificates, etc. during the day.

A. Rule Application (30 ER KOSPI / 17 ER KOSDAQ)

In normal cases, closing price of the previous day is used as the baseprice. However,

in case where the closing price is considered to be inappropriate for the baseprice,

KRX may set alternative baseprice for the day. For example;

24) Leveraged ETFs refer to funds, according to article 726(4)1 of Regulations on Financial

Investment Business, that are managed to track price movement of underlying assets multiplied by

the fixed rate (tracking ratio).

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i. In case when there is a corporate action such as capital increase (excluding the

3rd party allocation method and the public offering method), stock dividend,

stock split, stock consolidation (also known as a reverse stock split), and etc.,

theoretical price shall be the baseprice. This price adjustment is necessary to

maintain the consistency in value of securities issue before and after the corpo-

rate action.

ii. In case of newly listed issues or issues having capital reduction, the baseprice

shall be determined in the market through single price Call Auction method25).

B. Special Quotation Price (2 KOSPI / 2 KOSDAQ)

To reflect market pressure onto the price of securities issue even when there was no

transaction during the day, special quotation price (it can also be described as quota-

tion driven price) is construed as the closing price of the day and shall be used as the

baseprice for the next trading day. This special quotation price shall be the lowest

ask price (or the highest bid price) in case when there are ask (or bid) quotations with

prices lower (or higher) than the baseprice.

This price recognition, although there was no transaction, is necessary especially

when important information about the company is disclosed. In this case, there may

only be onesided quotations with no transactions in the market even though value of

shares should reflect the information.

When the price of preferred shares is 10 times higher than the price of its common

shares, bid quotations shall not be construed as the special quotation price.

(8) Publication of Quotation Information (126 ER KOSPI / 52 ER KOSDAQ)

Realtime quotation information is made public to assist the market participants in

making their investment decisions, thus increasing the efficiency of price discovery

in the market.

During continuous auction (regular session), the price and quantity of 10 consecutive

bid and ask quotations from (and including) the best quotations on each side and total

25) See III2(2)(a) for description on Call Auction Method.


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quantity of those quotations on each side are disclosed for public information. For

ELWs, quotations submitted by the Liquidity Providers26) are published separately.

During Quotation Receiving Hours for call auction sessions, price and quantity of 3

consecutive bid and ask quotations from (and including) the expected best quotations

on each side and expected call price and volume are disclosed. However, during quo-

tation receiving hours for opening call auction, disclosure of expected call price and

volume shall begin at 08:10.

2. Trade Executions

(1) Principles of Trade Execution (22 KOSPI / 17 KOSDAQ)

In the exchange market, a large number of quotations compete with each other for a

better price and for a faster trade. Therefore, to provide fair competition environment,

the exchanges need to establish the principles of trade executions i.e., the price prior-

ity and the time priority.

A. Price Priority

In case of bid quotations, a quotation with higher price has priority over the quota-

tions with lower prices. And in case of ask quotations, a quotation with lower price

has priority over the ones with higher prices.

Market quotations always have price priority over limit quotations. However, due to

daily price limitations, an ask market quotation and an ask limit quotation at the lower

price limit are regarded as having the same price priority. Same exception is applied

to bid market quotations and bid limit quotations at the upper price limit.

B. Time Priority

Among quotations at the same price and among market quotations, the quotation re-

ceived earlier has priority over those received later.

26) See III6 for description on Liquidity Providers.

36/37


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Ask Quotations (Quantity) Price Bid Quotations (Quantity)

20,150 10 (Best Bid)

800, 200 20,100 200, 300

100, 100 20,050 20

80, 100 20,000 200, 100

20 (Best Ask) 19,950

*, and refer to sequence of trade executions.

As shown in the table above, bid quotation and ask quotation is executed first in

accordance with price priority. Also, among quotations at the same price, quotation ,

which was received earlier, is executed before quotation.

Ex) Trade Executions

C. Exception to Time Priority (Simultaneous Quotations)

There is an exception to the principle of time priority during Single Price Call

Auction27) (hereinafter Call Auction). This exceptional case is applied;

i. when the opening price (call price) of an issue is determined at upper or lower

price limitations; and,

ii. when trading resumes after the trading suspensions (from circuit breakers28),

system malfunctions, or trading halts29)) with the initial price (call price) at up-

per or lower price limitations.

In these cases, bid quotations at upper price limitations (including bid market quota-

tions) or ask quotations at lower price limitations (including ask market quotations)

are construed as simultaneous quotations thus having no time priority over others(22 KOSPI / 17 KOSDAQ)30).

Rationale behind this exception is to ensure fair trading opportunities for all market

participants in cases of extreme market conditions. For example, if orders (quotations)

27) See III2(2)(a) for description on Call Auction Method.

28) See III3(1) for description on Circuit Breakers.

29) See III3(2) for description on Trading Halts.

30) Introduced on Oct. 3rd

2001 for KOSPI Market and on Mar. 7th

2005 for KOSDAQ market.


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are executed according to the time priority when the call price is determined at upper

or lower price limitations, the investors who have placed orders later at these prices

will have less chance of their orders being traded. This becomes an issue because

these investors can not correct their orders to have price priority over others due to

daily price limitations.

D. Principles of Simultaneous Quotations (34 ER KOSPI / 19 ER KOSDAQ)

When the call price (for opening price or initial price after the trading resumption andnot for the closing price) is determined at upper price limit, incoming ask quotations

should be evenly matched with bid quotations placed at upper price limit and vice

versa (to the case when the call price is determined at lower price limit). In these cas-

es, following principles shall be applied;

Customer priority

Customer orders have execution priority over Members proprietary orders.

This principle is established to prevent the conflict of interests arising from

Members conducting both the brokerage business and the dealing business.

Quantity Priority

Among customer orders and among proprietary orders, an order with larger

quantity has priority over an order with smaller quantity. Based on this se-

quence, fixed quantity of shares shall be distributed to the orders placed at price

limitations. This distribution method will provide level playing field for all

market participants (including retail investors) by matching on a pro rata basis

during exceptional call auction conditions.

Fixed number of shares to be distributed for each cycle is shown below;

KOSPI Market: 10trading unit (100shares) 50trading unit (500shares)

100trading unit (1,000shares) 200trading unit (2,000shares) 1/2 of

remaining quantity remaining quantity31)

KOSDAQ Market: 100trading unit (100shares) 500trading unit

(500shares) 1,000trading unit (1,000shares) 2,000trading unit

(2,000shares) 1/2 of remaining quantity remaining quantity

38/39


39/88

(Case) Opening price is to be determined at upper price limit (20,150KRW), and quotations in

the orderbook at the time are shown in the table below.

Ask Quotations(Quantity)

Price(in KRW)

Bid Quotations (Quantity)

4,000; 1,500; 600 (6,100) 20,150 (16,200) 1,000; 200; 10,000; 5,000;

1,700; 1,500 (3,200) 20,100 500 ; 700

1,300; 1,000 (2,300) 20,050 400

800 (800) 20,000

700 (700) 19,950

13,100 Total 16,200

* , refers to sequence of quotations received by the exchange.

Case here is that, as the Simultaneous Quotation goes into effect, entire 13,100 shares of ask

quotations is to be distributed to 4 bid quotations at upper price limit.

(Result) Distribution and executions (at 20,150KRW) based on Simultaneous Quotation

method is shown in the table below;

CycleQuotation

(10,000 shares)Quotation

(5,000 shares)Quotation (1,000 shares)

Quotation (200 shares)

100 100 100 100

500 500 500 100

1,000 1,000 400 2,000 2,000

3,200 700

800

Total Volume (13,100 shares) 7,600 4,300 1,000 200

Ex) Executions when Simultaneous Quotations goes into Effect

To provide better opportunities to the retail investors trading in small lots, the dis-

tribution quantity was further broken down into 6 cycles from 3 cycles32) on Aug.

25th 2003.

31) In case of securities with baseprice higher than 50,000KRW, the distribution quantity shall be; 10

shares 50 shares 100 shares 200 shares 1/2 of remaining quantity

remaining quantity

32) Previous 3 cycle distribution: 100shares 1/2 of remaining quantity remaining quantity.


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(Case) Lets assume that additional quotations~ (shown in the table below) have been

submitted after the market open.

Ask Quotations (Quantity)Price

(in KRW)Bid Quotations (Quantity)

3,000 1,000 500 20,150 2,400 700 1,000 500

After the determination of opening price (at upper price limitations), Simultaneous

Quotation is still in effect as there are remaining quantities unexecuted for quotation and .

In this case, although regular trading session has opened, Continuous Auction will not begin

until all quotations under Simultaneous Quotation are executed.

(Result) Simultaneous Quotation will be relieved after the executions of following quotations;

2,400 shares, 600 shares, 100 shares.

And following executions will be made according the principle of time priority; 900

shares, 100 shares, 400 shares.

(2) Method of Trade Executions

Method of Trade Executions varies according to competitive relationship amongtrading orders

i. Competitive Auction: trades are executed based on price competition among

buyers and sellers.

ii. Negotiated Transaction: trades are executed based on negotiated price between

buyers and sellers.

In general, KRX stock markets adopt competitive auction method, but, also adopt ne-

gotiated transaction method as an exception33).

A. Single Price Call Auction (23 KOSPI / 18 KOSDAQ)

(Application) As shown in the table below, Call Auction method is applied when

there is a need to find new equilibrium price after having discontinued trading in the

market.

33) See III5 for description on BlockTrading.

40/41


41/88

As shown in the table below, by sequentially matching from the highest bid quotations with

the lowest ask quotations, it is found that the largest quantity can be traded at 15,250KRW (Call

Price). Thus all bid quotations with prices above the call price and all ask quotations with

prices below the call price will be matched. Quotations at the call price will be executed

according to the time priority.

Ex) Executions based on Call Auction method

Call Auction is applied when; Quotations Participating in the Call Auction are;

determining opening price of

the regularsession

received from the start of quotation receiving

hours (08:00) to the opening of regularsession

(09:00)

determining initial price when

trade resumes after the trading

halts or suspensions

received during first 10 minutes of trade re-

sumption (in case of system malfunction, it may

vary depending on the case)

determining closing price of theregularsession

received during last 10 minutes of regular session(14:50~15:00)

determining periodic prices of

issues under liquidation trading

determining periodic prices of

Administrative Issues in KOSDAQ

Market

received from the start of quotation receiving

hours (08:00) to the closing of regularsession

(15:00)

(periodic call execution will be made at every 30

minutes interval)

determining periodic prices dur-

ing offhours call auction ses-

sion

received from the start of offhours call auction

session (15:30) to the end of the session (18:00)

(periodic call execution will be made at every 30

minutes interval)

(Call Execution method) using the price at which the most bid and ask quotations can

be matched (Call Price), trades are executed, in accordance with the time priority,

between following quotations;

i. entire quantity of ask quotations at prices lower than the call price and entire

quantity of bid quotations at prices higher than the call price

ii. for quotations at the call price, entire quantity of at least one side of quotations

(either ask or bid quotations)


42/88

Ask Quotations (Quantity)Price

(in KRW)Bid Quotations (Quantity)

15,400 1000

15,350 300

15,300 200 300

2,000 1,000 500 100

15,250 100 200

150 15,200

500 500 15,150

500 15,100

150 15,050

* : no execution; : partially executed; : entire quantity executed

** , refers to sequence of quotations received by the exchange.

In case where the call price is determined at daily price limitations, Simultaneous Quotations

will go into effect.

(Random End) When potential call price (including offhours call auction session)

deviates substantially during last minutes of quotation receiving hours, call execution

time shall be extended to a point randomly decided by the system. This Random End

rule34) is adopted to prevent price manipulation by placing abusive quotations during

Call Auction session.

Random End is triggered when potential call price (including offhours call auction

session) deviates by more than 5% (3% in case of offhours call auction session) from

either the highest or the lowest expected call prices35) published during last 5 minutes

to the call execution time. Once triggered, call execution time will be delayed for random

period of up to 5 minutes. Additional quotations (including correction or cancellation

of existing quotations) shall be received during this randomly extended period and

the call price will be determined at the new call execution time.

34) Introduced on Jan. 26th

2004 for KOSPI Market and on Mar. 7th


35) See III1(8) for description on Publication of Quotation Information.

42/43


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As shown in the tables below, bid quotations and ask quotations compete for a transaction in

the market. And as soon as the lowest ask quotation and the highest bid quotation are matched,

those 2 quotations will be executed at the price of earlier quotation

Ex) Trade Executions under the Continuous Auction method

Random End will not be applied if the potential call price is within 1% range from the

previous transaction price (the baseprice in case of call auction for opening price).

10,000

10,500

9,500

08:5509:00

+5%

-5%

Potential Call Price

Movement of

expected call price

Call Execution time shall be

randomly decided within 5 minutes

09:05

Ex) Application of Random End

B. Continuous Auction36)(24 KOSPI / 19 KOSDAQ)

(Application) Continuous Auction method is applied to all trading sessions where

call auction is not applied.

(Execution method) Based on principles of price priority and time priority, quotations

are executed instantly if there are matching quotations on the counter side. Thus, mul-

ti prices will be formed continuously in the market. This method allows investors to

make prompt transactions by reflecting the most uptodate market information to

their trading.

36) Defined as Multi Price Auction in the Business Regulations


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Ask Price Bid Results of Trade Executions

10,600 500

: 200 shares at 10,600KRW

: 200 shares at 10,600KRW

10,550

10,500

10,450

200 10,400

10,350 200

10,300

200 10,250

(Case 1)


Ask Price Bid Results of Trade Executions

10,600 100

: 200 shares at 10,600KRW: 200 shares at 10,600KRW

10,550

10,500 300

10,450200 10,400

10,350 200

10,300

200 10,250

(Case 2)


1. Market Management

(1) Temporary Market Suspension (Circuit Breakers)

A. Background

Most Exchanges adopt Circuit Breaker (hereinafter CB) system to temporarily sus-

pend the trading in the market when the benchmark index drops below certain level.

Purpose of this measure is to provide coolingoff period for market participants in

times of sudden market downfalls.

44/45


45/88

In times of sudden market downfalls, there are possibilities of investors overreacting

to the market direction rather than making rational decisions based on corporate

fundamentals. For that reason, the CB system was also adopted in KRX Stock

Markets37) as a complementary price stabilizing measure to the daily price limitations

(which had been extended to 15% from 12%).

B. Rule Application (25 KOSPI; 39 ER KOSPI / 26 KOSDAQ; 31 ER KOSDAQ)

CB will be triggered when KOSPI index (KOSDAQ index in case of KOSDAQMarket) falls by more than 10% from the closing value of previous day for at least 1

minute. CB mechanism is intended to prevent overreaction on sudden market down-

falls, thus, it is not triggered when the benchmark index rises by more than 10%.

Triggering of CB is limited to once per day to prevent frequent trading suspensions

which may bring further uncertainties in the market. Also CB is not triggered during

last 40 minutes of the regular session (from 14:20 to 15:00). The market, at all time,

should be closed as scheduled to minimize the investors potential losses from un-

expected market closure.

When CB is triggered, trading of all listed securities (excluding debt securities) in the

stock market and trading of equity related derivatives products in the KRX

Derivatives Market shall be suspended for 20 minutes. During this period, new trad-

ing quotations can not be submitted to the Exchange but market participants may can-

cel existing quotations.

Trading will resume when 20 minutes suspension period expires. After the trade re-

sumption, new quotations will be received for 10 minutes to determine the initial

price through Call Auction method. After having determined the initial price at 30

minutes from the triggering of CB, trades will be executed under the Continuous

Auction method.

37) Introduced on Dec. 7th

1998 for KOSPI Market and on Oct. 15th



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47/88


48/88

When Trading Halt has been triggered, relevant Certificate of Subscription Rights,

Subscription Warrants, or ELWs having concerned issue as an underlying asset may

also be halted for trading.

B. Trade Resumption

In case of a Trading Halt based on market rumors, trading will resume 30 minutes af-

ter the provision of responsive disclosure by the company38).

If the companys disclosure is made before the opening of regularsession, trading

will resume 30 minutes after the market open. And if the companys disclosure is

made during last 60 minutes of the regularsession, trading will resume on the next

trading day. In case where rumors continue even after the responsive disclosure or in

case where information in the responsive disclosure comes under the criteria for de-

listing or Administrative Issue, trade resumption may be postponed.

In case of Trading Halt based on heavy concentration of trading orders, trade re-

sumption time will be determined by taking into account of market conditions and

quotation conditions.

(3) Exdividends and Exrights (132 ER KOSPI / 53 ER KOSDAQ)A. ExDividendsExdividend is a market notification that investors purchasing Exdividend shares will

not have the rights to receive forthcoming dividend from the concerned company.KRX makes appropriate price adjustment on the exdividend date when there is a

need to reflect the change in share value.

Investors who have purchased the shares will become a shareholder of the company

when shares are delivered to those investors on the settlement date (T+2). Thus, ex

dividend date shall be 1 trading day prior to the Confirmation Date39) for listing of

38) According to the Disclosure Regulation, when KRX rquests for a responsive disclosure on such

influential rumors, the company has to respond within 1 day.

48/49


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shareholders who will have rights to upcoming corporate actions (hereinafter Book

Closure Date).

If the Book Closure Date is in middle of Trading Halts on the companys shares

(excluding the first day of the trading halt), trade resumption day becomes the exdiv-

idend date.

12/28 12/29 12/30 12/31 1/1 1/2

Closing price ofcum dividends

Ex-dividend date Last trading dayof the year

Trading Holiday(Book Closure

Date)

TradingHoliday

Settlement datefor trades on

ex-dividend date

Ex) Exdividend date for Companies with the Fiscal Year ending on December 31st

In case of companies issuing Stock Dividend, baseprice of the companys shares are

adjusted on the exdividend date to reflect changes in value of each shares.

(Closing price of cum dividends Number of shares before the dividend) / Number of shares

after the dividend

Calculation of BasePrice for ExDividend Issues

There is no baseprice adjustment for cash dividends because the amount of cash divi-

dends will be determined at the shareholders meetings which are mostly held in

March of following year. However, in case of planning on stock dividends, such com-

panies have obligation to disclose the expected amount before the end of fiscal year.

B. ExRightsExright is a market notification that investors purchasing Exrights shares will not

have the rights to subscribe for upcoming issuance of new shares from the concerned

company. Exrights will be applied when companies are issuing new shares to exist-

ing shareholders for capital increase.

39) Confirmation date for shareholders shall be predetermined (and disclosed) by the company.

Normally, companies designate last business day of the fiscal year as the confirmation date.


50/88

Similar to exdividend date, taking into account of the settlement schedule, exrights

date is 1 trading day prior to the Book Closure Date. Therefore, in order to have sub-

scription rights, investors have to purchase the companys shares at least 2 days be-

fore the Book Closure Date.

Accordingly, baseprice for ex rights issues shall be adjusted to reflect changes in val-

ue of a share caused by the capital increase from existing shareholders.

{(Closing price of cum rights Number of shares before the capital increase) + amount of

paidin capital increase40)} / Number of shares after the capital increase

Calculation of BasePrice for ExRights Issues

(4) Administrative Issues

A listed company will be designated as an Administrative Issue in the market if the

concerned company falls under the criteria for possible delisting in near future. Thosecriteria include deterioration of financial conditions, limited share distribution, lack

of liquidity ratio, etc., and the details are described in KRX Listing Regulations41).

KRX designates Administrative Issues as an alert to investors and also to provide a

grace period for the company so that it can make necessary efforts to prevent delisting

in the market.

A. Trading Method for Administrative Issues (23 KOSPI / 28 ER KOSDAQ)

In the KOSPI market, there is no different trading method for Administrative Issues.

However, in the KOSDAQ market, periodic (every 30 minutes) Call Auction method

will be applied to Administrative Issues during the regular session. This approach in

the KOSDAQ Market is to prevent irrational trading activities (speculations) and to

minimize the volatility of stocks under unfavorable conditions.

40) Amount of paidin capital increase shall be 0 when new shares are issued without consideration

(with no payment requirement).

41) 75 of KOSPI Market Listing Regulation and 28 of KOSDAQ Market Listing Regulation

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B. Trading Method for Liquidation Issues (20, 38 KOSPI; 56 ER KOSPI / 23

KOSDAQ; 28 ER KOSDAQ)

When delisting of a security has been determined, it will be provided with the last op-

portunity of trading in the exchange markets. This liquidation session will be limited

to 7 trading days.

During the regular session (9:00 ~ 15:00), periodic (every 30 minutes, 13 times a day)

Call Auction method will be applied for trading Liquidation Issues. During offhours

session (and including regular session block trading), there is no different trading

method applied to Liquidation Issues. Regardless of market sessions, Liquidation

Issues will not be applied with daily price limitations42).

(5) Investment Warning System

Market Oversight Commission (hereinafter MOC) runs Investment Warning

System43) to alert investors of securities issues having possibility of speculative or il-

legal trading activities. MOC will make 3 step warnings (InvestmentCaution,

InvestmentAlert, and InvestmentRisk) on Stocks, KDRs, and ETFs to prevent fur-

ther engagement of abusive trading activities and to minimize excessively reactive

trading behaviors.

A. Warning Criteria44)

InvestmentCaution: designated when a security is experiencing heavily con-centrated trading from few Member branches or from few Accounts, or etc.

42) For blocktrading of Liquidation Issues, price range of regular session block trading will be applied

accordingly. See III5 for description on BlockTrading.

43) To enhance the effectiveness of this warning system, the Market Oversight Regulation has adopted

previous abnormal price fluctuations warnings on Sep. 3rd 2007.

44) Described in Article 3, 33, 34 of Enforcement Rule on Market Oversight Regulation.


52/88

InvestmentAlert: designated when a security comes under following criteriaCriteria In Specific

Shortterm

Price Surge

(Preliminary Warning) when price increases by more than 75%

during last 5 days

(Warning) when above condition lasts for 2 consecutive days and

meeting following 2 conditions on this 2nd

day;

closing at the highest closing price in last 20 days; and

the concerned Issues 5day price increase rate is more than 6

times that of KOSPI index (KOSDAQ index in case of

KOSDAQ listed issues)

Mid to

LongTerm

Price Surge


during last 20 days

(Warning) when above condition lasts for 2 consecutive trading

days and meeting following 2 conditions on this 2nd

day;



times that of KOSPI index (KOSDAQ index in case ofKOSDAQ listed issues)

Repetition of

Investment

Caution

Warnings

(Preliminary Warning) when the issue, during last 20 days, has

been designated as InvestmentCaution for more than 5 times while

having price increase of more than 100%



day;





Others (Warning) when lifted from InvestmentRisk warning

52/53


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InvestmentRisk: designated when an InvestmentAlert issue comes under fol-lowing criteria

Criteria In Specific

Shortterm

Price Surge

Having 5 days passed since the designation as an InvestmentAlert

issue,


during last 5 days



day;





Mid to

LongTerm

Price Surge

Having 20 days passed since the designation as an Investment

Alert issue,


during last 20 days(Warning) when above condition lasts for 2 consecutive days and


day;





B. Sanctions and Lifting of Warnings

Any securities issues designated as InvestmentAlert or InvestmentRisk shall not be

eligible for credit transactions45) (meaning Members can not provide lending facility

for those securities) and Members are required to collect 100% margin when invest-

ors are entrusting trading orders on those securities.

In addition, securities issues having InvestmentRisk warning can not be used for sub-

45) Article 430 of Regulation on Financial Investment Business.


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stitution securities46) and the MOC may also request for Trading Halts when the share

prices after the designation is higher than the preceding closing prices for 2 consec-

utive days.

10 days after the designation, InvestmentAlert warnings or InvestmentRisk warn-

ings will be lifted when the concerned security does not fall under any of short term

or mid to longterm price criteria.

(6) Program Trading Quotations

A. Definitions

Program Trading generally refers to a computerdriven trading method. Having di-

verse investment strategies programmed to a computer system, it will assess realtime

market data and spot just the right market condition to instruct series of orders to be

routed automatically. These technical methods enable investors to make fast and ac-

curate (minimizing human errors) transactions to meet the intended investment strategies.

For transparent market operation purposes, current KRX Business Regulations define

Program Trading as following type of investment strategies (16 KOSPI / 2

KOSDAQ);

i. Index Arbitrage Trading is defined as set of trading activity which includes

buying (or selling) basket of constituent stocks in KOSPI200 index (KOSTAR

index in case of KOSDAQ Market, hereinafter the same in this section) and

selling (or buying) KOSPI 200 index futures or options47) for the purpose of

gaining profits by taking advantage of instant price differences between

KOSPI 200 constituent stocks and KOSPI 200 futures and options contracts.

46) See II4(3) for description of Substitution Securities.

47) According to the Regulation, set of buying and selling in this case does not have to be in

simultaneous matter to be categorized as Program Trading.

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ii. NonArbitrage Trading is defined as either buying or selling basket of 15 ormore constituent stocks in KOSPI index (basket of 10 or more constituent

stocks in KOSTAR index in case of KOSDAQ Market) at the same time by the

same investor.

B. Backgrounds to Program Trading Regulations

Due to its basic nature of trading behavior based on technical and systematical invest-

ment strategies, there are concerns that Program Trading may intensify market in-stability in times of high volatility. For instance, when massive sell or buy orders are

placed at the same time by the trading programs which anticipate similar market con-

ditions, market will be vulnerable to sudden price fluctuations. In this highly instable

environment, the Market is unlikely to function well for efficient price discovery of

listed securities.

Furthermore, when there are large quantities of arbitrage positions open (unsettled)

till the last trading day of relevant futures & options contracts, the Market is likely to

experience high volatility led by pressure on investors to offset those open positionson the last trading day48).

Therefore, Program Trading needs to be more transparent and regulated appropriately

in times of sudden price fluctuations.

C. Program Trading Quotations at Temporary Standstill (a.k.a SideCar)(16 KOSPI; 20 ER KOSPI / 13 KOSDAQ; 14 ER KOSDAQ)

Sidecar, which temporally stops the validity of all Program Trading Quotations, is a

market action to lessen the impact of Program Trading when the market is experienc-

ing severe price fluctuations.

In the KOSPI Market, sidecar is triggered when the price of KOSPI200 index

Futures49) deviates by more than 5% from the futures baseprice for at least 1 minute.

48) Especially because KRX Derivative market is one of the most heavily traded derivatives market in

the world (according to the statistics from FIA, Futures Industry Association).

49) The criteria will be based on most liquid futures contract which is usually the nearest month contract.


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In the KOSDAQ market, sidecar is triggered when following 2 price conditions lasts

for at least 1 minute;

i. price of KOSTAR index Futures deviates by more than 6% from the futures

baseprice; and

ii. the value of KOSTAR index deviates by more than 3% from its baseprice.

When sidecar is triggered due to a price increase, validity of all bid program quota-

tions will be suspended for 5 minutes, and vice versa to all ask program quotations

when sidecar is triggered due to a price decline.

The sidecar effect will be relieved when 5 minutes have elapsed from the triggering

point or when it is 40 minutes before the regularsession market closing. In case

where Circuit Breaker has been triggered while sidecar is in effect, the sidecar will

be relieved when trading resumes from the suspension.

D. Disclosure of Program Trading Quotations (130 ER KOSPI / 15 ER KOSDAQ)

To increase the transparency of Program Trading in the market, Members are re-

quired to tag all program quotations (classified into Arbitrage Trading and Non

Arbitrage Trading) before routing them to the Exchange (12 ER KOSPI / 7 ER

KOSDAQ).

Any market participants who intend to place (or to correct existing) program trading

orders during the market closing Call Auction session (14:50~15:00) on the last trad-

ing day of the futures or options contracts, are required to report the Exchange in ad-

vance of the details of such intended quotations by 15 minutes before the market clos-

ing of the day. This reporting regime (a.k.a Sunshine Rule) is established to prevent

potential manipulation of settlement price in the Derivatives market and to let invest-

ors be aware of high volatility.

In addition, to provide more information on program trading status in the market, the

Exchange discloses aggregation of daily Index-Arbitrage Trading balance (open po-

sitions) reported by the Members.

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ii. shall keep and maintain those confirmation information for at least 3 years and

provide such information to the Exchange or regulators upon request; and

iii. shall not be entrusted with covered shortselling orders or shall not route those

shortselling orders to the exchange if such transactions are unlikely to be set-

tled on T+2

Members may reject orders breaching relevant shortselling regulations(84 KOSPI /

40 KOSDAQ)

C. LongSell ConfirmationFor those investors who have no intention to make shortselling in the market,

Members may not conduct double confirmation procedures on sales orders when fol-

lowing conditions are met;

i. if the Member has received legitimate longsell confirmation from the custom-

er that he/she will not make any shortselling trades in the market; and

ii. if the Member has implemented proper screening system to block any short

selling orders from that particular customer

D. Regulations after the ShortSelling (182 KOSPI / 94 KOSDAQ)On the settlement date, Members are required to verify those customers who lack in

settlement balance51) (meaning customers inventory of securities is less than the

amount of securities needed for the settlement) and receive relevant proof records

(including Securities Borrowing and Lending contracts, etc.) from those customers to

confirm whether he/she has breached the ShortSelling Regulations. Members shall

keep and maintain these records for at least 3 years.

If confirmed that the customer has breached ShortSelling Regulations for 2 times

within 6 months period or when transaction amount relevant to the regulation breach

is more than 1 bil. KRW, all Members must receive document of proof (SBL contracts

51) In this case, Members must collect 100% margin from the customer on every trades for next 90 days.

See II4(3) for description on Special Margin Collection Rule


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or Lenders written confirmation) before receiving shortselling orders from that par-

ticular customer for next 30 days.

E. ShortSelling BanIf there are concerns on market conditions that may undermine the market stability,

KRX may ban covered shortselling in the market upon approval of FSC.

F. Uptick RuleAll covered shortselling orders must be placed at a price (at least one tick) higher

than the current market price of the securities being sold.

As an exception to this Uptick Rule, shortselling orders can be placed at the current

market price if the price is higher than the immediately preceding market price.

Market Prices 10,000 9,980 9,980 9,990 9,990

Market participants may place shortselling orders at 9,990KRW immediately after the

effective market prices of and.

Ex) Exceptional case when shortselling order may be placed at the current market price

In addition, Uptick Rule shall be exempt on shortselling orders with the purposes of;

i. Arbitrage trading (through index derivatives, singlestock futures & options,

ETFs, DRs);

ii. Hedging by Liquidity Providers and Market Makers52);

iii. Block trading; and

iv. Sales of ETF

52) See III6 for description on Liquidity Providers. Market Makers perform similar roles in the

Derivatives Market.

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(8) Correction of Members Transaction Errors (28 KOSPI / 27 KOSDAQ)

Members transaction errors occurred in the process of handling customer orders may

be corrected to its original intentions upon request. KRX provides this facility of cor-

recting transaction errors to enhance Members convenience in conducting brokerage

businesses.

A. Definitions

Under the Business Regulations, Members Transaction Error is described as an error

occurred by submitting quotations with inputs such as securities issues, quantity,

price, or bid/ask classification that are different from customers original intention.

And, because it is a Transaction Error, wrongly input quotations which have not

been executed or quotations that have never been submitted shall not be subject to

correction at the Exchange.

B. Method of Correction

In case of Members error occurred by wrong inputs on securities issues, quantity,

price, or bid/ask classification, the concerned Member will assume (transfer) custom-

ers balance (position) to its own proprietary account.

In case of Members error occurred by wrongly classifying customer account from

proprietary account or vice versa, correction shall be made by transferring the balance

to the originally intended account.

C. Procedure of Correction

When transaction error occurs, Members may submit an application for correction

(through electronic network) by 15:00 of the day following the error. Upon receiving

of an application, the Exchange will confirm the correction and reflect the change in

the daily settlement process.


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4. Special Cases of Trade Executions

(1) Determination of the BasePrice for IPO Stocks (30 ER KOSPI /Annex 1 of ER KOSDAQ)

A. Price Determination Method

Baseprice of initially listed shares (including KDRs) on the first trading day is de-

termined by Call Auction method with quotations received before the market open

(08:00 ~ 09:00). In this special case, quotations shall be received within the specified

price range as following;

i. for Common Stocks, 90%~200% of the appraisal price;

ii. for Preferred Stocks, 50%~200% of the appraisal price; and

iii. in case where net asset value per share is used as the appraisal price, 50% to

200% of the appraisal price

Once the baseprice has been determined, the issue in subject will be traded in accord-

ance with the Continuous Auction met

2010+Intro Trading KRX Stock Markets (1)

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