Korea's overnight FX session trades $2.8 billion a day, 4.3% of second-quarter derivatives volume

Put the two series side by side and the absorption story thins out. Offshore won-dollar NDF volume fell by $4.5 billion a day between June and September, a 12.7% drop ^[13], while the night session averaged about $2.8 billion a day ^[2]. Even if every dollar traded overnight had come out of NDF trading, the session would account for at most 62% of the decline ^[17]. Sedaily nonetheless reads the fall as a sign that the domestic night market has begun absorbing NDF demand ^[15]. The windows also differ: the night data, which the Bank of Korea supplied through the office of Rep. Kim Nam-joon, run from July 6 to Aug. 31 ^[1], while the NDF comparison is June against September ^[5]. The report does not break night volume down by counterparty, so how much of it came from overseas investors is unknown.

Scale matters too. The night session is about 4% of daytime volume, or 4.3% of the second-quarter daily average to be exact ^[2], and backing that out implies a derivatives market near $65 billion a day before round-the-clock trading began ^[14]. September's NDF volume is about 11 times the night session's daily average ^[18].

Liquidity is the condition the analysts return to. "If liquidity in the domestic night market becomes sufficiently abundant, more institutional investors can come in," said Kang Kyeong-hoon, a professor of business administration at Dongguk University ^[7]. Sedaily adds that when counterparties are hard to find or bid-ask spreads widen, trading costs rise and limit investor inflows ^[8]. The incentive under review to move investors from NDFs to DFs addresses settlement, and analysts say it has limits on its own ^[10].

We think the night session is moving in the direction the authorities want, since officials expect that as onshore trading picks up, offshore moves will carry less weight in the next day's domestic rate ^[16]. The evidence so far is a volume count, though, and Sedaily itself says it is too early to judge progress from night volumes alone ^[11]. The view fails in three ways. NDF volume could recover while night volume holds, which would mean the night market is adding trades instead of replacing them. The night volume could turn out to be mostly domestic banks moving existing trades to later hours. Or spreads could stay wide enough that overseas funds keep using NDFs. We would count NDF volume that keeps falling while the night session holds near $2.8 billion a day as support.