Slowly but surely, Korean institutions are starting to identify with the concepts of best execution and unbundling as the domestic market becomes increasingly outward looking, says Haeran Chang, head of equity sales at trading-focused Korean investment bank Leading.
Understanding of the concept is spreading slowly amongst domestic financial institutions, but is still behind markets like Japan, which has begun to make headway on bundling.
“Unbundling is not yet a common trend in Korea. There is some demand picking up and it will definitely happen in future, but not at this point,” Chang says.
The interest of Korean institutional investors in best execution and unbundling is likely to increase as they adopt a more international approach to investment. Leading, which provides securities trading, brokerage services, investment advisory, as well as FX and derivatives trading, has seen increasing demand from its clients for access to overseas markets. Cash-rich Korean institutional investors, including the country's National Pension Service, which is the world's fifth largest pension fund, have been buying foreign assets in the US and Europe due to the need to diversify portfolios that are currently concentrated on domestic equities and fixed income holdings.
“There's increasing demand for overseas investments by Korean investors because large funds have a lot of money and the Korean stock market is too limited for them,” Chang says.
In July 2010, Leading Asia (Holdings) Limited expressed its commitment to unbundling when it became a major shareholder in IND-X Holdings, a leading commission sharing agreement (CSA) service provider globally.
Leading's investment marks a new stage of growth for IND-X, which sees significant potential for the CSA business in Asia. Given that Leading is focused primarily on the domestic Korean market at the moment, and is developing its institutional activities looking at global markets, the fit with IND-X is “extremely complimentary”, says IND-X CEO Peter Twist. “Not all regulators have yet enforced the unbundling concept locally in the region, but certainly in markets like Korea, the regulators are probably having conversations about unbundling even if they are not doing anything about it.”
One aspect of trade execution in which Korea has been ahead of some Asia Pacific markets is alternative trading systems. Buy-side focused crossing networks ITG POSIT and Liquidnet provide block trading services for Korean stocks. In April 2008, agency brokerage Instinet launched a system for Korean equities that matches orders before the domestic market opens and executes trades at the day's primary market VWAP benchmark. And in November 2010, Korea Exchange (KRX), launched its non-displayed liquidity pool, A-Blox, which offers VWAP crossing. To date, however, the regulator still does not allow off-exchange trading. The market as a whole is also highly retail-dominated although there have been significant improvements in institutional trading recently. According to a KRX study, the number of participants in the derivatives market using systemic trading methods, including algorithmic trading, increased in 2009 with 35% of domestic institutional investors and 76.5% of foreigners utilising DMA and algorithmic trading.
A-Blox is designed to complement K-Blox, the exchange's existing block-trading service that allows members to cross internal orders, execute negotiated trades, or search for counterparties.
In a report ”Electronic trading in Asia-Pacific', published in October 2010, Anshuman Jaswal, senior analyst, capital markets at research firm Celent, predicted that the A-Blox would be a popular addition to Korea's electronic trading landscape.
“A growth in the demand for trading large lots in Korea and the ongoing growth in dark pools in other parts of the world were the main drivers behind the development of A-Blox. With transaction costs running at 52 basis points on the KRX, A-Blox is expected to be well received by Korea's algorithmic trading industry.”