South Korea’s stock market has experienced more trading halts in 2024 than during the 2008 financial crisis, prompting concerns over whether the country’s sidecar mechanism remains effective. The system, which temporarily halts program trading for five minutes when futures prices fluctuate sharply, has been activated 49 times on the benchmark Kospi this year—nearly double the 26 halts recorded in 2008. The Kosdaq index has also seen 32 interruptions, surpassing the 19 halts from that crisis year. South Korea’s market volatility has ranked among the highest globally this year, raising further questions about the system’s adequacy. Though neither market has triggered a sidecar since early September, persistent volatility could lead to further disruptions.
The sidecar mechanism was introduced in 2001 to limit the spread of futures-driven volatility into the cash market. On Kospi, a halt is enforced when futures deviate by 5% or more from the prior close and the move persists for at least one minute. For the Kosdaq, a halt is triggered when the Kosdaq 150 futures price moves 6% or more and the spot index moves 3% or more in the same direction for at least one minute. The system’s design originally focused on preventing program trading from amplifying volatility, but its effectiveness has been questioned as trading trends have evolved.
Most major markets have abandoned sidecar systems in favor of alternative measures. The U.S. discontinued its version in 1999, citing minimal impact on volatility, and now relies on circuit breakers that halt all trading for 20 minutes. Hong Kong operates a similar volatility control mechanism, while Japan enforces at least a 10-minute trading pause when Nikkei 225 futures hit price limits, with limits gradually widening to accommodate volatility. The U.S. also uses a Limit Up-Limit Down mechanism for individual stocks, demonstrating a more targeted approach to volatility management.
Frequent use of sidecars in Korea may also diminish their intended impact. Market participants, accustomed to repeated halts, may no longer perceive them as a critical warning. One asset management executive proposed raising the trigger thresholds to restore urgency. Korea doubled its daily price-move limit to 30% from 15% in 2015, reflecting the changes in the market environment.
