Korea Exchange: Explained
BY TIO Staff
|July 29, 2024The Korea Exchange (KRX) is the largest and only securities exchange operator in South Korea. It is a significant player in the global financial market, offering a wide range of financial products and services, including stocks, bonds, and derivatives. This article will delve into the intricacies of the KRX, providing a comprehensive understanding of its operations, significance, and impact on the global trading landscape.
Established in 2005, the KRX is the result of the merger of three previously existing South Korean exchanges: the Korea Stock Exchange, the KOSDAQ, and the Korea Futures Exchange. Today, it serves as a central hub for securities trading in the country, facilitating the buying and selling of a variety of financial instruments. Let's dive deeper into the world of the KRX and explore its various facets.
Historical Background
The history of the Korea Exchange is intertwined with the economic development of South Korea. The country's first stock market, the Korea Stock Exchange, was established in 1956, in the aftermath of the Korean War. It was a period of rapid industrialization and economic growth, and the stock market played a crucial role in mobilizing capital for businesses.
In 1996, the KOSDAQ (Korea Securities Dealers Automated Quotations) was established as a separate market for small and medium-sized enterprises (SMEs). It served as a platform for these companies to raise capital and grow. The Korea Futures Exchange, the country's first derivatives market, was established in 1999, offering futures and options on key financial instruments.
Merger and Formation of KRX
In the early 2000s, the South Korean government embarked on a major financial market reform. One of the key components of this reform was the merger of the country's three exchanges into a single entity, the Korea Exchange. This merger, which took place in 2005, was aimed at enhancing efficiency, reducing transaction costs, and improving the competitiveness of the South Korean capital market.
The merger resulted in the creation of a comprehensive securities exchange that offers a wide range of financial products and services. Today, the KRX is a fully integrated exchange, providing trading, clearing, settlement, and depository services. It operates both a cash market, where stocks and bonds are traded, and a derivatives market, where futures and options contracts are traded.
Structure and Operations
The Korea Exchange is structured as a stock company with shares owned by the government and private entities. Its operations are overseen by a board of directors, which includes representatives from the government, financial institutions, and listed companies. The KRX operates under the supervision of the Financial Services Commission, the country's financial regulatory authority.
The KRX operates two main markets: the KOSPI market and the KOSDAQ market. The KOSPI (Korea Composite Stock Price Index) market is the main board of the KRX and lists large and established companies. The KOSDAQ market, on the other hand, is a separate board for SMEs and high-tech companies. Both markets operate on an electronic trading system, allowing for efficient and transparent trading.
Trading Hours and Procedures
Trading on the KRX takes place from Monday to Friday, excluding public holidays. The trading day is divided into several sessions: pre-opening session, opening session, continuous trading session, and closing session. The continuous trading session, which is the main trading session, takes place from 9:00 AM to 3:30 PM local time.
Orders are matched based on price-time priority, which means that the highest bid or the lowest offer is executed first. If there are multiple orders at the same price, the order that was placed first is executed first. The KRX uses a trading halt mechanism to prevent excessive price volatility. If a stock's price moves by more than a certain percentage within a certain period, trading in that stock is temporarily halted.
Financial Products and Services
The Korea Exchange offers a wide range of financial products and services. In addition to stocks and bonds, the KRX also trades derivatives, including futures and options on key indices, individual stocks, interest rates, and foreign exchange rates. The KRX also offers ETFs (Exchange Traded Funds), REITs (Real Estate Investment Trusts), and other structured products.
The KRX also provides a variety of services to market participants. These include listing services for companies seeking to go public, market data services for investors and analysts, and clearing and settlement services for trading members. The KRX also operates a central securities depository, which provides safekeeping and administration of securities.
Key Indices
The KRX calculates and publishes several key indices, which serve as barometers of the South Korean stock market. The most well-known of these is the KOSPI 200, which tracks the performance of the 200 largest companies listed on the KRX. Other important indices include the KOSPI 50, the KOSPI 100, and the KOSDAQ Composite.
These indices are widely used by investors and analysts to assess the overall performance of the South Korean stock market and to benchmark the performance of individual portfolios. They also serve as underlying assets for a variety of derivative products, including futures and options contracts and ETFs.
Role in the Global Financial Market
As the only securities exchange operator in South Korea, the KRX plays a pivotal role in the global financial market. It is a member of the World Federation of Exchanges, the global association of regulated exchanges, and the Asian and Oceanian Stock Exchanges Federation. The KRX also has partnerships with several foreign exchanges, including the New York Stock Exchange and the London Stock Exchange.
The KRX's significance in the global financial market is underscored by the fact that it is home to some of the world's largest and most well-known companies, including Samsung Electronics, Hyundai Motor, and LG Electronics. These companies' stocks are widely held by foreign investors, and their performance has a significant impact on global stock indices.
Impact on the South Korean Economy
The KRX plays a crucial role in the South Korean economy. It serves as a platform for companies to raise capital, facilitating economic growth and job creation. The KRX also contributes to the development of the country's financial industry, providing a wide range of financial products and services and promoting financial innovation.
Moreover, the KRX plays a key role in wealth creation for individuals and institutions. By providing a platform for investing in stocks, bonds, and other financial instruments, the KRX enables individuals and institutions to grow their wealth and achieve their financial goals.
Regulation and Governance
The Korea Exchange operates under a strict regulatory framework to ensure fair and transparent trading. The KRX's operations are overseen by the Financial Services Commission, which sets the rules and regulations for securities trading in South Korea. The KRX also has its own internal regulations and procedures to ensure compliance with these rules.
The KRX is committed to maintaining the highest standards of corporate governance. Its board of directors is composed of independent directors, who are responsible for overseeing the KRX's operations and ensuring its accountability to shareholders. The KRX also has several committees, including an audit committee and a risk management committee, which assist the board in its oversight role.
Investor Protection
The KRX has several measures in place to protect investors. These include a trading halt mechanism to prevent excessive price volatility, a market surveillance system to detect and prevent market manipulation, and a dispute resolution mechanism to handle complaints and disputes between market participants.
In addition, the KRX operates an investor protection fund, which compensates investors in case of default by a trading member. The KRX also provides investor education programs to help investors make informed investment decisions and promote responsible investing.
Conclusion
The Korea Exchange is a vital component of the global financial market, serving as a platform for trading a wide range of financial instruments. With its robust regulatory framework, advanced trading system, and diverse product offerings, the KRX plays a crucial role in facilitating economic growth and wealth creation in South Korea and beyond.
Understanding the workings of the KRX is essential for anyone interested in trading or investing in South Korean securities. Whether you are a seasoned trader or a novice investor, a deep knowledge of the KRX can help you navigate the complexities of the South Korean financial market and make informed investment decisions.
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