Kospi sidecar nears 50th trigger this year, sparking calls to overhaul the system

A market safeguard designed to curb sudden stock swings — known as a sidecar, which temporarily suspends program trading orders — has been triggered nearly 50 times on the Kospi alone this year, prompting growing calls to reassess whether the mechanism still serves its purpose.

According to Korea Exchange on Friday, the Kospi sidecar has been activated 49 times this year, including a buy-side trigger on Thursday. Just one more activation would mark the 50th. Of the 49 triggers so far, 25 were sell-side and 24 were buy-side.

The frequency is extraordinary. The sidecar was triggered only twice in 2024 and three times last year. Even during the 2008 global financial crisis, the mechanism was activated just 26 times on the Kospi for the full year — 14 buy-side and 12 sell-side. This year's count is nearly double that.

The Kosdaq market has also surpassed its 2008 record of 19 activations. The sidecar has been triggered 32 times on Kosdaq this year — 18 on the buy side and 14 on the sell side.

The sidecar temporarily halts program trading orders to prevent sharp moves in the futures market from spilling over into the spot market. It was first introduced on the Kospi in November 1996, with specific activation criteria established and applied from 2001.

On the Kospi, the sidecar kicks in when the KOSPI 200 futures price rises or falls 5 percent or more from its base price for at least one minute, suspending program trading for five minutes. On the Kosdaq, it triggers when the Kosdaq 150 futures index surges or drops 6 percent or more from the previous day's closing price, or when the spot index moves 3 percent or more, with either condition sustained for one minute.

The core problem, critics say, is that the activation thresholds have remained unchanged even as market conditions have changed dramatically.

When the sidecar was designed, the focus was on preventing sharp futures price swings from amplifying volatility in the spot market through program trading. But the trading landscape has shifted significantly with the rise of high-frequency trading and algorithmic strategies. Suspending only program trading orders for five minutes has limited effectiveness in dampening market volatility, analysts say.

Particularly this year, as domestic market volatility has surged, the current thresholds are being met far more frequently, driving the spike in sidecar activations.

Market participants are calling for the activation criteria to be redesigned to reflect the current trading environment. Options under discussion include raising the trigger threshold beyond the current 5 percent move in KOSPI 200 futures, or broadening the scope of the mechanism — which was built around program trading — to better fit today's market structure.

The risk that excessive activations erode the sidecar's warning signal is also fueling the push for reform. If the mechanism fires repeatedly without dampening real volatility, its value as a safeguard could be undermined, analysts warn.

Sidecars are rare among major global markets. The United States abolished its sidecar system in 1999 after the Securities and Exchange Commission analyzed trading during market downturns and concluded the mechanism had no clear effect in cushioning declines. Japan relies on circuit breakers, while Hong Kong uses a volatility control mechanism to manage market swings.

Korea Exchange is not currently reviewing any specific overhaul of the sidecar system, according to sources familiar with the matter.

"Trading methods and market participation have become far more diverse than in the past, so uniformly halting program trading simply because futures prices have moved by a set amount is increasingly out of step with the times," said Kim Dae-jong, a professor at Sejong University's business school. "It is more realistic to restructure the system around more sophisticated stabilizers such as circuit breakers."