Forex trading 24-hour system… ‘Drain’ widens, but ‘breakwater’ lowers

Starting July 6, South Korea's foreign exchange market will transition to a 24-hour continuous trading system for the won-dollar, removing the existing 7-hour gap. This significant change follows the introduction of nighttime trading in July 2024 and aims to align the Seoul market with global currency markets that operate around the clock.

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We are moving in the same direction as global currencies that are based on 24-hour trading.

The primary goals of this extended trading period are to enhance convenience for domestic and international investors, as well as for import-export businesses, and to reduce overall transaction costs. Market participants anticipate increased accessibility for foreign investors and a gradual rise in trading volume. The Seoul Foreign Exchange Market Operating Council's revision of the "Seoul Foreign Exchange Market Code of Conduct" underpins this transition.

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It's different whether the market is open and you choose not to enter, versus the market being closed and you are unable to enter.

Currently, the average daily trading volume in the Seoul foreign exchange market, handled by two main brokers, stands at $17.5 billion in the first half of this year, a notable increase from the previous year. While nighttime trading accounts for 25% of this volume, the expectation is that the 24-hour system will absorb some liquidity from the offshore non-deliverable forward (NDF) market, potentially stabilizing currency fluctuations.

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The drain has widened, preventing the morning flood (gap volatility), but the breakwater has lowered, allowing the water inside the harbor to churn in real-time.

Analysts suggest that the extended trading hours will act as a "drain" to absorb shocks from overnight news, preventing sharp, sudden movements when the market opens. However, concerns persist regarding the potential for price distortions during overnight trading due to lower liquidity. Experts emphasize the need for increased overnight liquidity and enhanced real-time monitoring systems to mitigate these risks, as the reduced liquidity could lead to temporary price distortions during periods of market stress.

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If overnight liquidity is limited, temporary price distortions may accompany the shock absorption process. Expanding overnight liquidity supply and advancing the real-time monitoring system must proceed in parallel.