The arrival of trading venue competition in Korea may bring valuable improvements to the country’s trading landscape, incentivising the incumbent exchange to cut prices and improve its technology, says Hani Shalabi, head of Advanced Execution Services, Asia Pacific at Credit Suisse.
A proposed change to the country’s Financial Investment Services and Capital Markets Act (FSCMA), issued by Korea’s Financial Services Commission (FSC) on 26 July 2011, would see a licence system introduced to allow new stock exchanges or alternative trading systems in the country for the first time.
Korea is one of the ‘Next Eleven’, a group of countries identified by Goldman Sachs as having the potential to become the largest economies during this century. The country’s equities market accounted for 10.9% of total Asia-Pacific trading volume in October 2011, according to figures provided by Thomson Reuters Equity Market Share Reporter.
Although the Korea Exchange (KRX) has no rivals as yet, many market participants are hopeful that the threat of competition will encourage it to follow a similar path to the Australian Securities Exchange (ASX), which embarked on a radical overhaul of its own trading capabilities – including a reduction in trading fees, the launch of three new trading platforms and a technology upgrade – ahead of the launch of competitor Chi-X Australia in late October 2011.
“For any market, competition is good,” says Shalabi. “In Australia, just the threat of Chi-X coming in reduced the ASX execution charges and made them upgrade their system to a faster one. These are excellent changes for the investor. Hopefully the FSC changes will spur something similar in Korea.”
KRX is already pursuing IT upgrades, product diversification and alliances with foreign exchanges. In October, the exchange revised the margin rates of currency futures to make them more competitive, announced plans for the listing of three new exchange-traded funds (ETFs), released two new indices for Korean treasury bonds and signed a market information service agreement with index provider MSCI.
However, problems remain. For foreign investors, the primary difficulty when trading in Korea is the stamp duty payable on each sell transaction, according to Shalabi, which can add as much as 30 basis points to a trade. Yet while he does not see much likelihood of this changing in the near future, Shalabi does see significant potential advantages arising from competition – especially if competition means smaller tick sizes.
“In most of the Asian exchanges, the tick sizes are much larger than in developed markets like the US,” he says. “Small tick sizes spur greater trading activity. When Chi-X Japan and SBI Japannext launched in Japan for example, they offered tick sizes that were 1/10th of those available on the Tokyo Stock Exchange. That’s one of the best tools an ATS has – it can essentially offer more nuanced prices that will offer end-investors a better deal.”
Competing alternative venues could also produce downward price pressure, which would also be to the advantage of market participants. In addition, new entrants may seek to differentiate themselves by providing new order functionality, such as pre-market volume-weighted average price (VWAP) crossing or iceberg orders that do not currently exist on KRX. Alternatively, the incumbent exchange may pre-empt such moves by introducing similar initiatives itself, as in Australia.