FINANCE

[Feature] Fractional share trading in S. Korea faces regulatory hurdles

By Jie Ye-eun
  • Published : Oct 5, 2021 - 16:46
  • Updated : Oct 5, 2021 - 18:03

(123rf)
Fractional trading in South Korea will kick off next year, offering retail investors wider access to the nation’s stock market. But the new trading system, if implemented without detailed legal consideration, might cause market disruption among investors, regulators and even legislators, experts say.

Some even claim the system might have limited impact in the local stock market for quantitative growth, saying that the market has few “expensive” equity shares that might be suitable for fractional trading.

The envisioned fractional trading system, which would allow investors to buy a portion of a share, is set to be introduced in the third quarter of next year, but the transaction speed will be much slower than regular trading, according to market insiders. It may take several years before the actual real-time fractional share transactions become available after laws are revised, they said.

And only those who buy a full share can exercise rights as a shareholder, not those who purchase only a fraction of them.

Voting rights of those with fractional shares will be temporarily transferred to a trustee, the Korea Securities Depository, under the current financial investment services and capital markets act. But nothing has been decided yet on whether the law involving fractional shareholders’ voting rights would be revised. A KSD official declined to comment further but said the agency may “keep all options open.”

A Financial Services Commission official also said it looks forward to coming up with clear and enforceable measures on voting rights of fractionally owned shares before ending the first half of next year, and also admitted the capital markets act requires revision.

Experts say authorities have to benchmark cases of other countries in order to successfully implement a fractional trading system in the local market.

“Shareholders have rights to exercise their voting power on major issues, including electing directors and proposals for fundamental changes affecting companies such as mergers or liquidation,” Korea Capital Market Institute research fellow Kim Min-ki said. “The rights should apply to fractional shareholders as well. ... (The authorities) need to put much time and considerable effort to change laws and ordinances.”

The idea behind fractional share investing is to provide a more affordable way for day traders with smaller budgets to invest in quality companies. The new system will allow domestic stock trading up to six decimal places.

Currently, investors need about 3 million won ($2,500) to purchase one share from each of the top 10 large-cap stocks on the Kospi 200. Under the new system, they can buy stocks in two decimal places for as low as 30,000 won, the FSC officials said.

Lee Hyo-sub, head of the financial industry department at the Korea Capital Market Institute, said that nearly half of the investors who started investing in stocks last year were in their 20s and 30s. They got a taste of the game with some gains, but the returns were relatively low due to their tight budgets.

By owning a variety of different valuable fractional shares, retail investors can reduce the likelihood of losing money as well, Lee added.

Relative high brokerage fees on fractional trading are also likely to place a burden on investors with small budgets. Since brokerages have to merge orders of fractional shares placed by different investors to trade them in full shares, they are likely to charge more in commission fees, experts say.

Major brokerage houses in Korea are choosing to waive commission fees for handling stock transactions, close to zero on local shares and a 0.15-percent fee on US-listed shares. The local stock trades in fractions won’t be free, based on calculations of the ongoing transaction fees of 0.25 percent and more on fractional trading of US stocks, they said.

A FSC official said commission fees were “all up to brokerages,” expressing hope that the fees would get lower with time. Local firms are forecast to join a heated race to attract fractional share investors when the option becomes available.

Fractional trading of overseas shares is possible at some local brokerages so far but it is expected to be expanded to all brokerages after receiving the necessary approvals. In 2019, the FSC granted Shinhan Investment and Korea Investment & Securities the green light to offer fractional investing services on foreign stocks as innovative financial service providers.

With the rise of direct investment demand among investors, there has been a growing interest in fractional trading. Small domestic investors’ accumulated trading volume of fractional overseas-listed shares surpassed the $1.2 billion mark after its launch in October 2018, data showed.

According to Rep. Youn Kwan-suk of the ruling Democratic Party of Korea who quoted FSC data, the investors’ trading of foreign stock transactions through fractional trading services stood at $1.25 billion in total as of August this year. The number of clients came to 715,000 over the cited period, while the monthly average trading volume per person was between $141 and $1,039.

The transaction figures surged each year, from $10 million logged between October 2018 and September 2019 to $160 million a year later. It jumped again to $1.08 billion in the following year, the data showed.

Another expert presented a positive outlook on fractional trading of domestic shares, despite growing concerns over a sharp market correction.

“More people (across the country) will likely become interested in stock investment when fractional share trading service becomes fully available next year,” said Seo Ji-yong, a business professor at Sangmyung University. “(Investors) owning partial shares of high-priced ‘emperor shares’ will also help increase liquidity.”

However, he also raised questions about the effectiveness of any legal and systemic tweaks that will be introduced to regulate the new trading system. The professor further warned of possible technical glitches and other teething problems local brokerages may experience due to a flood of fractional share trading orders when the system launches.