[KH Explains] Will alternative trading platform shake up Korean stock market?

Korea’s stock market is set to enter a new phase with the upcoming launch of the first alternative trading system for the Korea Exchange, the nation’s sole bourse operator that has enjoyed almost 70 years of monopoly.

Nextrade, a consortium of 34 securities and tech firms established in November 2022, aims to earn the final regulatory approval within the year for its official debut in the first quarter of next year. More than 20 brokerage houses here have already expressed their intention to join the new platform.

Nextrade will offer off-exchange trading of stocks listed on the Korea Exchange with cheaper commission fees and more flexible operating hours. However, it will not be able to offer transactions of exchange-traded funds or execute initial public offerings. The operator plans to raise the bar by stages after the launch.

Alternative trading system

Nextrade claims it can offer a better trading environment for investors by generating competition between bourse operators.

Longer trading hours could also be a plus. Once launched, the new bourse plans to operate from 8 a.m. to 8 p.m., longer than the current 9 a.m. to 3:30 p.m. hours provided by the Korea Exchange. In the long term, it plans to extend the hours in stages to up to 24 hours.

Investors could benefit in terms of pricing as well. Brokerage houses can offer a more favorable price for investors as they can compare prices offered by the Korea Exchange and Nextrade. Both buyers and sellers will also be able to trade stocks at more favorable prices.

Nextrade's lower commission could also be an advantage. While the Korea Exchange charges a 0.0023 percent commission for the brokerage houses, Nextrade said it plans to bring down the commission by up to 40 percent. However, as brokerage houses charge a separate commission for retail investors, it is uncertain whether the discount will be practical for the investors.

The Financial Services Commission plans to unveil more detailed operational plans for the ATS this month.

Boon for foreign investors?

The new trading system may not have been designed specifically to attract more foreign investors into the local stock market but Nextrade says offshore investors will also benefit from longer trading hours.

“For instance, Korean investors make transactions on the US stock market during daytime hours which are after-hours for the US through an ATS operator,” an official from Nextrade said.

Blue Ocean Technologies, the only authorized ATS operator in the US that was launched in 2007, enables overnight trading of US stocks for investors in the Asia-Pacific time zone.

“Once Nextrade is launched, foreign investors in the US and Europe could participate in trading on the Korean bourse during their daytime hours, which could induce more market participation,” the official said.

Bumpy road ahead

Industry watchers say it would be a tricky job for the new bourse to become a real game changer, considering Korea Exchange’s long-held legacy and low-risk sentiment within the financial industry overall.

Under the Capital Markets Act, an ATS can only handle a 15 percent share of the transaction volume made during the regular hours of the Korea Exchange, and 30 percent of each share.

Blue Ocean made up almost 10 percent of the total stocks traded in the US as of 2022.

With the limit on the market share, offering competitive prices through securing sufficient transactions may be difficult.

“An ATS would need to secure a significant amount of liquidity to be competitive,” said Lee Hyo-seob, a senior research fellow at the Korea Capital Market Institute, adding that the local stock market is rather small for further competition.

“It would be challenging for the new ATS operator to have an edge as the Korea Exchange charges a relatively low commission for transactions compared to its counterparts overseas,” Lee said.