[KH Explains] New bourse operator to transform stock market

Nextrade expected to offer reduced transaction fees, but exclusion of ETF and government bonds may hamper its growth

Nextrade logo (Nextrade)

A new bourse operator is looking to shake up the Korean stock market next year, with a launch that would break up Korea Exchange's monopoly for the first time in nearly seven decades.

On July 19, the Financial Services Commission granted preliminary approval for the alternative trading system called Nextrade.

A total of 34 companies, including leading brokerage houses and ICT firms, as well as the Korea Financial Investment Association, a non-profit, self-regulatory organization which has over 560 member companies in the financial sector, are actively working together to develop this new stock trading platform.

Nextrade is now eligible to apply for final approval within 18 months.

After submitting the final approval application, a monthlong review process with the FSC will decide whether Nextrade can be launched in Korea.

Nextrade plans to launch its service at the end of 2024.

The introduction of the new ATS is anticipated to break the market monopoly held by the KRX since its establishment in 1956.

Based on Bain&Co's report, Korea's ATS is anticipated to capture a 12 percent share of the stock market in Asia's fourth-largest economy. Furthermore, it is projected to achieve an annual operating profit of 36 billion won ($32 million) within five years of its establishment. The 67-year-old KRX posted 262 billion won in operating profits last year.

“By fostering competition between ATS and KRX, we expect several advantages, including reduced transaction fees, cost savings for investors, faster trading services, higher overall trading volume in the stock market due to lower transaction costs, and a decrease in bid-ask spreads,” an FSC official said.

When looking into foreign countries’ cases, it also shows that the introduction of ATS has had predominantly positive impacts -- such as significant improvements in trading services, fostering healthy competition, and enhancing overall market efficiency.

According to Nextrade CFO Kim Jin-kook, numerous foreign cases were reviewed as potential references for Nextrade.

“ATS in the US are not suitable for us to benchmark. Instead, the most appropriate benchmarking option for us lies in an Australian ATS,” Nextrade CFO Kim said.

Kim explained that many US bourse operators like Better Alternative Trading System, also known as BATS, initially operated as ATS but later evolved into regular stock exchanges due to their growth in scale.

He clarified that Nextrade’s objective is not to emulate a regular stock exchange like those in the US.

Instead, Kim said that Nextrade is hoping to be like Cboe Australia.

The Australian ATS, established in 2011, has achieved significant growth, holding up to 20 percent of the market share in Australia and processing approximately $3.8 billion in cash equities trading daily.

The platform accommodates around 2,100 listed companies and slightly over 230 ETFs.

Despite its potential growth, there are concerns about Nextrade's expansion being limited compared to Cboe Australia, as Nextrade will be restricted to handling only stock trading. Additionally, critical functions like the listing review process will remain under the exclusive jurisdiction of the Korea Exchange and not be part of Nextrade's scope.

"The listing review process requires substantial manpower, and we must approach roles and responsibilities of the review process carefully. Even in foreign markets, direct listings by ATS are uncommon," Kim explained.

Regarding the limitation of tradable assets to listed stocks, Kim hinted at the organization's commitment to pursue amendments to relevant regulations.

"We are also disappointed by the restricted scope, limited to stocks and depositary receipts. Expanding to include ETFs and government bonds would enhance Nextrade's competitiveness," he added.

Korea took the first steps towards establishing a new bourse operator in August 2013 through amendments to the Capital Markets Act.

However, discussions about an ATS gained traction only in 2020, coinciding with the Korean stock market's strong growth amid the COVID-19 pandemic.

A total of 89 companies here raised a combined 19.7 trillion won through initial public offerings in 2021 alone.

During that time, it was pointed out that the KRX held a monopoly in the Korean stock market, commanding a 100 percent share.

In contrast, in the United States, entities like the New York Stock Exchange and Nasdaq collectively accounted for only 43 percent of the entire US stock market, indicating a more diverse and competitive landscape compared to the situation in Korea.

Consequently, the Korea Financial Investment Association collaborated with other industry stakeholders and established Nextrade in November 2022.

By Song Seung-hyun(ssh@heraldcorp.com)