Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
Korea's sidecar system faces test as triggers hit record high
Dealers work at Hana Bank in Seoul, Wednesday. Korea Times photo by Shim Hyun-chul
By Lee Yeon-woo
Once a rarely used emergency brake, the sidecar mechanism has become a recurring feature of Korea's stock market amid bouts of extreme volatility.
Its growing use has raised questions about its effectiveness, as stocks have often continued to plunge until circuit breakers were triggered, industry officials said Thursday.
According to the Korea Exchange, sidecars have been triggered 43 times in the benchmark KOSPI this year, far surpassing the 26 activations recorded during the 2008 global financial crisis. They have also been triggered 29 times on the secondary Kosdaq, bringing the total number of sidecar activations in Korea’s stock markets this year to 72.
Introduced in 1996, the sidecar is designed to prevent sharp price swings in the futures market from spilling over into the spot market through program trading.
On KOSPI, a sidecar is triggered when KOSPI 200 futures move by at least 5 percent and remain at or beyond that threshold for one minute. On Kosdaq, it is activated when Kosdaq 150 futures move by at least 6 percent and the spot index moves by at least 3 percent in the same direction.
Once a sidecar is triggered, program-trading orders in the relevant direction are suspended for five minutes. However, regular orders placed by individual investors, as well as futures trading, remain unaffected.
Doubts have recently emerged over whether sidecars can effectively contain a broad market sell-off, particularly during periods of heightened volatility. On Tuesday and Wednesday, a sell-side sidecar was triggered after Korean stocks tumbled in early trading, but losses continued to deepen, eventually prompting a market-wide circuit breaker.
Critics say the market's structure has changed with the growth of algorithmic and high-frequency trading. Market information and unfilled orders may instead build up during the suspension, causing orders to flood in when trading resumes and reigniting volatility.
They also argue that the five-minute restriction on program trading is unlikely to change investor sentiment or the market's underlying direction. As prices approach the trigger threshold, investors may rush to place orders before program trading is suspended, accelerating the move toward the threshold.
"As market volatility has become persistently elevated, frequent sidecar activations have weakened the mechanism's effectiveness as a safeguard against excessive price swings," a capital market official said.
Others, however, say the latest sell-off reflects not a failure of the mechanism but an inevitable correction after an extended period of overheating.
"No one said anything when the market was rising abnormally, but now that it is falling, concerns are suddenly mounting," said Shin Se-don, professor emeritus of economics at Sookmyung Women's University. "Given how overheated the market had become, some correction was inevitable."
The U.S. introduced sidecars in 1988 after the "Black Monday" crash, when program trading was blamed for worsening the sell-off. However, it scrapped the mechanism in 1999 after the Securities and Exchange Commission found that trading halts could undermine price discovery. The country now relies on market-wide circuit breakers for broad sell-offs and the Limit Up-Limit Down mechanism for sharp moves in individual stocks.
Hong Kong's Volatility Control Mechanism is triggered when the potential execution price of a major stock moves beyond a specified threshold relative to its price five minutes earlier. Trading then continues for five minutes within a prescribed price band.
Rather than halting trading altogether, the mechanism allows prices to form within a limited range, giving market participants time to reassess conditions and adjust their orders.