South Korea's NXT trading System: A Double-edged sword for Financial Market Reform?

In today's rapidly changing financial markets, financial regulators in various countries have sought to enhance the efficiency and transparency of the market through innovative means. A major decision recently announced by South Korea's Financial Regulator (FSC) to launch an alternative trading system called NXT in March 2025, aiming to overhaul its stock market, has attracted much attention in the financial world.

The reform of South Korea's financial market is undoubtedly carried out against the backdrop of increasingly fierce competition in the global financial market. Traditional stock exchanges, such as the Korea Stock Exchange (KRX), have played an important role in maintaining market order, providing trading platforms, and regulating market behavior. However, with the rapid development of financial technology and the diversification of investor needs, the limitations of traditional exchanges have gradually emerged, such as high transaction costs and insufficient transaction efficiency. Therefore, FSC proposed to solve these problems by introducing NXT system to improve the efficiency and convenience of securities trading, which is undoubtedly worthy of recognition.

The NXT system, as an innovative initiative of the Korean financial regulator, has several notable features. First of all, it provides lower transaction fees, which has a positive significance in reducing investors' transaction costs and improving market activity. However, whether low fees are enough to attract investors also needs to consider the stability of the trading system, transaction speed and information transparency and other factors. If there are deficiencies in these areas, low fees may only be a palliative.

Secondly, NXT system introduces different stock buying and selling price mechanisms, which increases the market flexibility to a certain extent. However, the introduction of such a price mechanism may also lead to increased price volatility and increase market risks. Especially in the case of information asymmetry, investors may face greater risk of price fluctuations.

In addition, the FSC allows short selling on the NXT system, but prohibits it during pre-market and after-market trading hours. This regulation aims to balance the liquidity and stability of the market. However, the introduction of short selling mechanism may also be abused by some investors to conduct market manipulation or speculation, thereby disrupting market order. Therefore, how to effectively regulate short selling and prevent its negative effects is an important challenge that FSC needs to face.

On the NXT system, KRX's daily stock price limits and market stabilization measures, such as circuit breakers, will also be introduced. These measures have played an important role in maintaining market order and preventing extreme price fluctuations. However, whether it is fully applicable to transplant it directly to NXT system still needs further observation and analysis.

As a market protection measure in extreme cases, the effectiveness of circuit breakers largely depends on the setting of trigger conditions and recovery mechanisms. If it is not properly set, it may cause the market to overreact or underreact, thus affecting the normal operation of the market. Therefore, the FSC needs to fully consider the rationality of its triggering conditions and the flexibility of the recovery mechanism when introducing the circuit breaker mechanism.

A total of 32 brokerage firms will join the NXT system, which shows the positive attitude of financial institutions towards the NXT system. However, the size and strength of these brokerage companies, whether they have enough market influence and technical strength to support the operation of NXT systems, still need to be further investigated.

At the same time, about 800 companies will be listed on the secondary stock exchange, a move that will help expand the market size and increase market diversity. However, the quality and profitability of these companies, whether they have the ability to continue to operate and grow, are also issues that investors need to pay attention to. If the quality of listed companies is uneven, it may lead to a lack of investor confidence and affect the overall performance of the market.

With the introduction of the NXT system, the FSC faces greater financial regulatory challenges. How to maintain market order and investors' interests while ensuring market efficiency and convenience is the core issue that FSC needs to solve. The FSC needs to strengthen the daily supervision of the NXT system to ensure that its trading behavior complies with laws, regulations and regulatory requirements. This includes efforts to crack down on illegal activities such as market manipulation and insider trading, as well as continuous monitoring of the stability and security of the trading system.

Secondly, FSC needs to establish an effective investor protection mechanism to improve investors' risk awareness and self-protection ability. This includes measures such as enhancing investor education, providing easy channels for complaints and establishing an investor compensation fund.

Finally, the FSC also needs to strengthen cooperation and exchanges with international financial regulators, learn from international advanced experience, and enhance the international competitiveness of the Korean financial market. This includes participating in the formulation of international financial rules, strengthening cross-border regulatory cooperation, and promoting the opening up of financial markets.

The NXT system launched by the South Korean financial regulator, as an important measure of the stock market reform, its original intention is worthy of affirmation. However, from the perspective of financial professionals, the launch of NXT system also faces many challenges and risks. The FSC needs to strengthen market supervision and investor protection while safeguarding market efficiency and convenience to ensure the stable operation and healthy development of the market. At the same time, the FSC also needs to strengthen cooperation and exchanges with international financial regulators to enhance the international competitiveness of the Korean financial market. Only in this way can the NXT system truly become a powerful engine to promote the development of the Korean financial market.