Korea Exchange plans to launch after-market ETF trading from September, allowing transactions between 4pm and 8pm, while alternative exchange NXT will start pre-market and after-market ETF trading from November. The expansion comes as the Korean ETF market capitalization exceeds 500 trillion won, but securities industry groups warn that liquidity providers (LPs) face growing tax burdens under the current education tax system. The education tax applies only to trading profits without offsetting hedging losses, creating cost pressures as LPs conduct repeated buy-sell transactions to maintain market liquidity.
Korea Exchange and NXT Expand ETF Trading Hours
Korea Exchange is collecting eligible ETFs from asset management companies for after-market trading, planning to start with highly liquid products. Currently, ETFs can only be traded until 3:30pm, but the September expansion will enable trading until 8pm. NXT exchange will launch pre-market trading from 8am to 8:50am and after-market sessions starting from November, beginning with approximately 100 ETFs before gradually expanding coverage.
Education Tax Burden on Liquidity Providers
Liquidity providers continuously present buy and sell quotes to ensure investors can trade ETFs at appropriate prices, conducting hedging transactions with underlying assets to reduce price discrepancies. The education tax calculates liability based on securities trading profits, but does not reflect losses from hedging transactions that LPs conduct as part of their market-making function. For financial companies with annual revenue exceeding 1 trillion won, the maximum education tax rate increased from 0.5% to 1% this year. Industry observers note that LPs may widen bid-ask spreads or reduce liquidity provision to manage rising tax costs, potentially increasing transaction costs for investors.
Industry Proposes Profit-Loss Offset System
The Korea Financial Investment Association states that the current profit-only taxation method fails to reflect LP trading characteristics, and implementing a profit-loss offset system would maintain market liquidity functions while reducing excessive tax burdens. A Financial Investment Association official noted that managing tracking error has become increasingly important in the ETF market, requiring institutional improvements to reduce cost burdens so LPs can actively provide quotes. A legislative proposal to reduce the maximum education tax rate from 1% back to 0.5% has been introduced, though securities industry participants view profit-loss offset adoption as a more effective solution than simple rate reduction. Profit-loss offset systems have previously been implemented for foreign exchange, derivatives, and derivative-linked securities taxation calculations.
FAQ
What role do liquidity providers play in ETF trading?
Liquidity providers continuously present buy and sell quotes to ensure investors can trade ETFs at appropriate prices, conducting simultaneous hedging transactions with underlying assets to reduce price discrepancies.
Why does the education tax burden increase for liquidity providers?
The education tax applies only to securities trading profits without offsetting losses from hedging transactions, and the maximum rate increased from 0.5% to 1% this year for financial companies with annual revenue exceeding 1 trillion won, creating higher costs as LP trading volume grows with market expansion.
