Regulatory delay shelves Korean ATS plans

Plans by Korea-based brokers to establish an alternative trading system in the country have stalled due to regulatory uncertainty.

Plans by Korea-based brokers to establish an alternative trading system (ATS) in the country have stalled due to regulatory uncertainty.

The project, which involved six of Korea’s largest institutional brokers and Credit Suisse, has now been put on hold after the rules – which would have let ATSs challenge the incumbent Korea Exchange (KRX) – failed to make it through parliament. Credit Suisse declined to comment on the plans.

The ATS rules were part of a series of proposed amendments to the Financial Investment Services and Capital Markets Act by the Financial Services Commission (FSC), Korea’s market regulator, last July. The proposals were designed to bolster Korea’s position as a regional financial hub.

The proposals also included other financial reforms that were set for adoption this year, such as the deregulation of local investment banks. While the rules are expected to be re-proposed before the end of the year, a presidential election in Korea scheduled for 19 December means market participants are doubtful the legislation will obtain approval.

Under the proposed rules, no firm would be able to hold more than 30% of an ATS, creating the need for a collaborative approach among market participants.

“Large local brokerage houses have been in discussion to take part in the consortium since last year,” said Jeannie Lee, director, head of execution marketing at Korea Investment and Services, one of the local brokers interested in participating in the plans. “More details of ATS can be determined once the bill is passed in the parliament and the acting guidelines are released by the FSC. An ATS in Korea may take time to develop given the current political situation. But I believe it will be implemented eventually and will offer different trading options in Korea.”

Lee added that the potential introduction of competition would be supported by local market participants. 

“An ATS would not only provide a higher level of anonymity and liquidity for the buy-side when trading in an ID market such as Korea, but it should also enhance competition with the traditional exchange, which eventually may lower the cost of trading and provide price improvement,” said Lee. “A lower cost of trading may increase market turnover, which means better revenue for brokers as well as for exchanges. This is in line with the Government’s vision to reform the Korean financial market and to take it to the next level.”

Tal Cohen, CEO of market operator Chi-X Global, which operates alternative venues in Japan, Australia and Canada, told last month that his firm was also weighing its options for launching a Korean ATS. 

Plans for a Korean ATS bear resemblance to a similar initiative in Europe almost four years ago when a group of the largest brokers clubbed together to launch Turquoise, a pan-European multilateral trading facility. Turquoise was initially created to pile pressure on domestic exchanges to lower trading fees and break the monopolies they held. A majority stake in Turquoise was eventually sold to the London Stock Exchange Group in 2010.