Spotlight Korea: Professional Perspectives
By Adrian O
With increased market capacity and lower latency, Korean brokers are looking to continually build their level of service for international clients. Adrian O, Director, Execution Marketing, Korea Investment & Securities Asia (KIS), offers FIXGlobal his perspectives on the practicalities of ‘trading Korea.’
In just over a few decades, Korea has evolved to become one of the world’s major stock markets. Not only is it one of the most active derivatives markets (KOPSI 200 options), but it has also recently been classified by the FTSE as a“Developed Market.” The Capital Market Consolidation Act in Korea, which took effect in 2009, has opened doors for brokerages, asset management firms, futures companies and trust companies to compete with each other and with banks and insurers. With the new Act, financial companies in Korea are no longer limited to operating under one business type; they are now allowed to operate any financial market or product for which they obtain a license. For instance, banks are now able to enter into the securities and options business. As a result, the Korea Stock Exchange (KRX) upgraded its entire system in March 2009 in order to deal with the new regulation and capacity issues.
From your experience, what do your clients look for in a Korean broker?
As a single market local broker, we have been focusing in greater detail on the Korean market in every aspect of trading. As such, international institutional clients expect us to provide our local expertise at every step of the investment process, from investment decision making to execution and settlement. From providing greater corporate access, to timely publishing of research and local news, we offer local flavour, market colour and trading anonymity. The concentration of all our resources in a single market allows us to provide the broadest spectrum of services and cater to different customer’s needs in a more flexible manner. For instance, statistical arbitrage (Stat Arb) customers who are sensitive to speed of execution, can utilize proximity hosting in the local data centres provided by some of the local brokers, rather than turning to a 3rd party vendor. This kind of value-added service is possible because most of the major Korean brokerages own their own data centres, with KIS, for example, employing over 300 IT staff to serve the Korean market. Other examples of the broad spectrum of services in Korea are IPOs and Stock Borrowing and Lending (SBL), where local brokers, typically, are strong in sourcing deals.
What are the challenges for institutional international clients trading in the Korean market?
Each Asian market is unique, but when it comes to the Korean market, it is widely known that the market standards and regulations are somewhat more unique than other markets. Some regulations, such as the “Real Name Act,”which are unique in Korea, make it an ID market for international institutional clients. As such, the exposure of trading information to the market is greater than in other markets, and it often impacts the execution costs. Therefore, maintaining trading anonymity and confidentiality has been a key concern of international buy-side clients for trading in the Korean market. Large local brokers, like KIS, with sizeable market presence in other segments, such as domestic institutions and retail, have been a popular choice as an execution broker. This is due to the camouflage effects of mingling foreign volumes with other segments, thus preventing possible front running by other market participants.
Overall, most challenges in trading the Korean market arise from country-specific rules, regulations and certain tax systems that are different from other markets. International clients expect local brokers to be an expert adviser in providing solutions to derive best execution within any given market situation.
How do you communicate with the exchange and regulators? Do you have any ways to deliver feedback from market participants?
The Korean Exchange has been working very closely with its member firms, not only because they are shareholders, but also because they understand the importance of hearing feedback from the market. Traditionally, talking to member firms has been one of its major channels for feedback. When launching new products or changing major practices, KRX typically calls for members meetings or briefing sessions, where members of KRX can hold extensive discussions with KRX representatives on given topics. Generally, the acceptance or feedback by member firms about new products or changed practices has been regarded highly by KRX.
Depending on the topic, KRX will sometimes form a special task force meeting, comprising leading large local brokers and foreign members, to gather information and shape market consensus. For instance, when the Financial Supervisory Services (FSS) in Korea lifted its short sell ban in April 2009, KRX held a special task force meeting in January with a few large local brokers and two foreign members, to gather market information and members’practical advice on implementing safeguards to prevent naked short selling for institutional clients and DMA orders. KIS’ execution team in Seoul strongly recommended following the international market standard by using FIX tags 54 and 114, when indicating a covered short sell. The manual check, which was originally proposed, could have made DMA short sell orders practically impossible, had the initial proposal gone through.
Every now and then, we still hear feedback from our international clients on market-specific questions and concerns. Being positioned on the frontline and hearing the latest updates from KRX and FSS, it is the local brokers’ responsibility to deliver customer requests to the exchange and market regulators, whilst reflecting their needs as much as possible.