South Korea is set to overhaul its currency market by allowing the won to trade 24 hours a day starting July 6, a significant shift from the restricted offshore access that has been in place since the late 1990s. The move is designed to make it easier for international investors to buy and sell the won, but banks warn it also introduces new challenges, including overnight staffing and increased liquidity risks during low-volume periods.
What is changing?
Since the Asian financial crisis, South Korea has maintained tight controls on the won, limiting offshore trading and forcing foreign investors to convert currencies only during local business hours. The new 24-hour trading regime is part of a broader package of reforms that includes an offshore won settlement system and rules allowing foreign institutions to directly hold and use the won, rather than converting in and out for each transaction.
These changes aim to deepen the spot market—the market for immediate currency exchange—by encouraging more trading to occur outside of Seoul's regular hours. According to State Street's Shen Li, about 20% of spot volume already happens during offshore hours, often during the London morning session. The hope is that extended hours will attract even more activity, reducing the need for investors to rely on expensive derivatives as a workaround.
Why this matters for investors
For everyday investors, the immediate impact may seem distant, but the won's accessibility has broader implications for South Korean assets. The country's stock market, the KOSPI, has long suffered from what analysts call the "Korea Discount"—a tendency for Korean stocks to trade at lower valuations compared to global peers, partly due to limited foreign access and currency hedging costs.
A smoother, more liquid currency market could help narrow that discount. When global fund managers can easily hedge their currency exposure, they are more likely to invest in Korean equities and bonds. This is particularly relevant as index provider MSCI kept South Korea in its emerging markets category this week, citing concerns about "insufficient onshore liquidity" and accessibility. The next review is a year away, and the success of the 24-hour trading regime will be a key test.
If more trading shifts into the spot market during non-Seoul hours, bid-ask spreads—the gap between the price at which you can buy and sell—could narrow, and hedging costs could fall. That would make it cheaper for large funds to size and manage their Korea exposure, potentially boosting demand for Korean assets.
The risks of round-the-clock trading
However, 24-hour trading is not without risks. Thin liquidity during certain windows, especially when fewer dealers are active, can amplify price moves triggered by headlines. The won is already under pressure against the U.S. dollar, and a small order can move prices more than usual in such conditions. Banks will need to manage more volatility in the middle of the night, which could lead to wider spreads during those periods.
This dynamic is not unique to the won. Other currencies that have moved to extended hours have experienced similar teething problems. The key will be whether the reforms attract enough new participants to smooth out the peaks and troughs.
Broader context
South Korea's push to internationalize the won comes as the country seeks to boost its global financial standing. The reforms are part of a broader effort to make Seoul a more attractive hub for international finance, alongside other initiatives like the massive investment plans by Samsung in the semiconductor sector. A more open currency market could also help stabilize the won against major currencies, reducing volatility that can hurt exporters and importers alike.
For now, the focus is on the July 6 launch. Investors will be watching closely to see whether the promised liquidity materializes or whether the night shift brings more headaches than benefits. The outcome will likely influence MSCI's decision next year and could set a precedent for other emerging markets considering similar moves.
