Market operator Chi-X Global is tracking regulatory progress in Korea with the aim of establishing a new alternative trading system (ATS) in partnership with local brokers.
In July last year, Korea’s Financial Services Commission (FSC) proposed a change to the country's Financial Investment Services and Capital Markets Act that would allow alternative trading systems to challenge the monopoly of the Korea Exchange (KRX).
The change was part of a series of financial reforms that were set for adoption this year and also included deregulation of local investment banks.
But recent National Assembly elections in Korea, as well as an expected change at the top of the FSC, mean potential ATS operators are waiting for clarity before moving ahead.
“There is still some uncertainty on if the law will pass, but Chi-X will work closely with brokers in Korea to assess the demand for competition,” Tal Cohen, CEO of Chi-X Global, told theTRADEnews.com. “If there is, we see Korea as an interesting market where we think we can lower the cost of trading, reduce friction and increase the attractiveness for offshore capital.”
Compared to Japan and Australia, where the firm launched independent venues in July 2010 and November 2011 respectively, Chi-X Global will have to take a different approach in Korea when setting up an ATS.
As presently drafted, the new Korean rules will not allow any party to own more than 15% of an ATS. Cohen said this would require any Chi-X venture in Korea to be a collaborative effort with local brokers. Local markets sources have also claimed that a group of large brokers in Korea are already planning to team up and establish their own ATS for Korean stocks.
The introduction of alternative trading systems in different regions around the globe puts pressure on domestic exchanges to improve service and lower trading fees. The arrival of Chi-X Australia, which garnered a 2.5% share of overall trading last month according to data from Thomson Reuters, led the Australian Securities Exchange to slash its execution costs and make a series of technological improvements to its trading system.
The Tokyo Stock Exchange overhauled its technology at the start of 2010, partly in response to competition from new venues, and has recently received approval to merge with the derivatives-focused Osaka Securities Exchange. Chi-X Japan grabbed 1.36% of trading in Japanese shares in July.
But while KRX is planning an upgrade of its trading system at some point this year, Cohen suggested the introduction of competition in Korea has “less to do with the KRX and more to do with the fact that it's a robust market that justifies greater choice”. Korea was the third-largest market in Asia last month, behind Japan and China, according to Thomson Reuters data.