Korean alternative trading system Nextrade granted preliminary approval

[Courtesy of Nextrade]

South Korean securities firms and related institutions are moving swiftly as they establish an alternative trading system (ATS) called Nextrade Co., which has received preliminary approval from financial authorities.

This marks a significant milestone as it is set to break the monopoly of the Korea Exchange that has been in place since 1956.

While the introduction of ATS is expected to lead to lower securities trading fees, some are expressing concerns about the potential challenges in price discovery within the market.

On Wednesday, the Financial Services Commission announced its preliminary approval granted to Nextrade’s ATS investment brokerage business. This is the first ATS preliminary approval since the related regulations were introduced in 2013.

“Nextrade can apply for official approval within 18 months from the date of preliminary approval, considering the time required for establishing a stable computer system. Once it receives official approval, Nextrade can begin its operations,” the FSC said.

Nextrade anticipates that it will officially launch sometime in the second half of next year, making it the first ATS to be introduced in the country. ATS refers to a market where market participants can trade securities outside of regular exchanges.

The introduction of competition in the capital market trading function is expected to lead to improvements in services such as trading fees, trade execution speed, and trading hours.

“We have prepared for the preliminary approval by securing human and physical resources and establishing a computer system. We will continue to prepare for the official approval,” said Kim Hak-soo, CEO of Nextrade and former head of the Korea Financial Telecommunications & Clearings Institute.

A total of 34 companies, including 26 securities firms, four related institutions, and four IT companies, have invested in Nextrade. Among them, eight firms, including Korea Financial Investment Association, Mirae Asset Securities, Samsung Securities, Shinhan Investment, NH Investment & Securities, KB Securities, Kiwoom Securities, and Korea Investment & Securities, are founding members.

Discussions on ATS in South Korea began over a decade ago. Although the legal framework for its establishment was initially prepared in 2013, progress was slow due to strict requirements concerning capital, share ownership, and the securities subject to trading. After easing certain requirements through a legal basis in 2016, the pace started to pick up, leading to the founding of Nextrade in November last year.

ATS was first introduced in the U.S. in 2007. Following its introduction, market share for traditional exchanges like the New York Stock Exchange and NASDAQ declined, prompting them to consider more actively incentivizing investors through lower fees. As of the end of 2021, the U.S. has a total of 58 ATS in operation. According to the Korea Investment & Securities Association, 28 percent of securities trading in the U.S. is conducted through ATS, while Europe and Japan see 18 percent and 8 percent of their securities trading happening through ATS, respectively.