Volatility Interruption (VI)

Definition

Volatility Interruption (VI) is a sophisticated mechanism used in the Korean stock market (KRX) to prevent extreme price volatility in individual stocks. * When a stock price fluctuates beyond a certain threshold, continuous trading is suspended. * For 2 minutes, the market switches to a Call Auction (Single Price Auction) method, where orders are collected but not executed until the period ends.

Types of VI

1. Dynamic VI: Triggered when the current potential execution price deviates by 2-3% from the most recent execution price.
   • Purpose: To cushion the shock of sudden, short-term price spikes (often caused by erroneous orders or fat fingers).
2. Static VI: Triggered when the price deviates by 10% from the opening price (or the previous static VI trigger price).
   • Purpose: To manage the accumulated volatility over the trading session.

Comparison: US Market (LULD)

• The US equivalent is the Limit Up-Limit Down (LULD) rule.
• While LULD pauses trading for 5 minutes if a stock moves outside a specified price band (e.g., 5-10%), the Korean VI keeps the market "open" for order entry but switches the matching mechanism to an auction style for 2 minutes.

Key Takeaway

• VI acts as a "Speed Bump." It doesn't stop the car (stock) completely, but it forces it to slow down and regroup before continuing its direction.