The two dominant alternative trading systems (ATSs) in Japan – SBI Japannext and Chi-X – are in talks to expand their services to Korea, AsianInvestor can confirm.
Korea’s Financial Services Commission (FSC) proposed legislative changes this June to allow securities firms to set up alternative trading platforms for stocks and depositary receipts – which will bring an end to Korea Exchange’s 57-year monopoly.
Following a consultation period, final revisions to the draft legislation are due to be completed by August 29 and are expected to be implemented shortly afterwards.
It looks as though to participate foreign ATS players will require minimum capital of W20 billion ($17.8 million), while they will be limited – at least initially – to 5% of total daily trading volume on the KSX.
Both Chuck Chon, chief executive of SBI Japannext, and Chi-X’s global CEO Tal Cohen tell AsianInvestor they are in discussion separately with local brokerages about forming ATS consortiums in Korea.
With stakes in any future ATS operator capped at 15%, a consortium will be required, with each expected to comprise around seven shareholders. This will likely be made up of domestic brokers and foreign service providers.
Chon confirms that SBI Japannext is in talks with eight major local brokerages, including online player Kiwoom Securities, about forming a consortium.
He argues that the firm’s experiences with its proprietary trading system (PTS) in Japan means it can bring “knowhow and technology to our prospective partners as a new ATS operator in Korea”.
However, industry sources argue that the capital requirement for foreign entry and the 5% trading cap will limit participation and imperil profitability – threatening to deter a number of players.
They note that a requirement of $18 million in capital appears excessive next to the comparative figure in Japan of ¥300 million ($3 million).
“Such a high capital requirement is not consistent with risks inherent in the business model of ATSs, which don’t carry positions and hence bear no price risk,” says Nicholas Ronalds, head of equities at the Asia Securities Industry & Financial Markets Association (Asifma). “Overcoming such a high cost hurdle could be virtually impossible for a potential provider of ATSs in Korea.”
Asifma, which represents a number of global brokers and dealers, highlighted its concerns over the W20 billion requirement in a written submission to Korea’s FSC last week.
But industry reservations over the limits have not dampened the enthusiasm of SBI Japannext and Chi-X to enter Korea. Both say they have been engaged with the FSC and local brokers for the past two years in anticipation of just such a market opening.
On the 5% trading limit, Cohen concedes that while the rules “won’t prevent the introduction of competition, investors might be hesitant to invest in the infrastructure to access an ATS if the perceived benefit is limited”, adding that Chi-X will “welcome additional opportunities to participate in industry working groups to shape incoming rules”.
Although not as large as Japan, Korea is a sizeable market. Murat Atamer, Asia-Pacific director for Credit Suisse’s AES trading platform, estimates daily trading volume of Korean equities at $4-5 billion, with bid-ask spreads on stocks of about 20 basis points. Japan’s daily trading volume hovered around $30 billion in June.
Korea’s derivatives market is also substantial. Options and futures contract trading volume on the Kospi 200 index totaled more than $20 billion in June. Given this, Atamer suggests that investors eager to conduct arbitrage trades will be interested in trading multiple venues. Comparative trading on the Nikkei in June stood at $15-20 billion.
“To provide our clients with higher liquidity at the best possible prices, we would need to trade on ATSs out of necessity,” says Atamer.
Industry players generally agree that the introduction of players such as SBI Japannext and Chi-X into Korea would bring cost benefits to investors in terms of trading costs and lower-latency execution than the incumbent KSX.
Credit Suisse, in fact, is among the foreign brokers to be linked with having interest in an ATS start-up, although Atamer declines to comment on the speculation.
But it appears likely that SBI Japannext and Chi-X Japan will be taking their rivalry to a new market. Already they compete directly in Japan to attract trading volume away from the leading exchanges.
SBI Japannext claims it accounts for 5% of all shares traded on the Tokyo Stock Exchange as of July, while Chi-X Japan says it has 4.7% of the Nikkei 225 as of the end of last year.