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What Next for Korean Traders?

Mirae Asset Securities’ Jamie Kim, spoke to FIXGlobal about the progress in Korea and what it still has to achieve.
Despite being a worldleading economic power, Korea still faces challenges in upgrading its electronic trading capabilities and attracting the foreign investment community and foreign investors to its shores. While electronic trading is growing in popularity, obstacles remain to greater adoption.
Trading securities on the Korean exchanges is not as simple as it could be given the relative maturity of its economy and financial markets. This is doubly the case for international investors, who face complications and limitations in the trading process. While online trading is increasingly the norm, the adoption of FIX as a common protocol is patchy with progress curtailed by well-established domestic electronic trading technologies.
A brief overview of the trading process goes some way to illustrate this point. Firstly, trading can only be done by a firm authorised by the Korean Exchange (KRX). For an individual investor to trade, they must first open an account with one of theseapproved firms. The next hurdle is to pay the pre-advanced cash deposit required before any order – on or offline – can be placed. The system will first check if this deposit has been made, before the order is transmitted to the stock exchange via the computerized order-routing system offered by the exchange, or developed by the securities broker.
Korean securities companies receive client orders via written instruction, telephone, fax or online. With online trades, the company must enter into a prior agreement with the investor on the type of orders placed, and fulfill the requirements imposed by KRX.
Investors can trade online via HTS (Home Trading System), PDA, mobile phone or ARS (Automatic Response System). According to the KSDA (Korea Securities Dealers Association), HTS remains the most popular channel, as the online trading process is fully automated.
Online orders received by securities companies are sent directly to the trading system of the Korean exchanges without manual re-input. The large securities companies usually develop their own online trading platforms while smaller ones can make use of the system offered by KOSCOM, a subsidiary of KSE (Korea Stock Exchange).
As for FIX, currently only offshore foreign clients use this standard communications protocol for electronic trading. Our view is that the high cost of upgrading technologies across the financial community and within the exchanges, and lack of a dominant OMS vendor, is curtailing wider usage.

Drivers – and inhibitors – for online trading
The rise in the popularity of online trading can be attributed to a number of factors: changes in the regulatory system, rapid advances in technology, the high penetration of personal computers and the efforts of securities firms to encourage more online trading among their client base.

In comparison with the US market, trading in Korea is characterized by wider spreads, tighter liquidity and lower electronic trading volumes. However, things are changing rapidly. Markets in Korea (and across Asia) are expanding, and higher demand for electronic trading has driven liquidity higher. These trends will undoubtedly create different trading strategies and require an increasingly sophisticated trading infrastructure.
These factors, coupled with the growing presence of bulge bracket brokerages and more advanced technology, look set to create greater opportunities for those seeking to trade in the Asia region. It is increasingly recognised among the investment community that electronic trading can lower barriers to entry, increase efficiency, reduce risk and allow trading companies to withstand the significant increase in trading volumes in real time and at lower costs.

Looking ahead
The trend is definitely towards more global traders – and foreign clients – moving into Korea. However, for Korea to realise its full potential as an international trading market, it must put greater focus on three areas: improving consistency in its regulatory environment, upgrading its technology infrastructure; and adopting a common protocol in line with the expectations of the international trading community. Despite our concerns about cost, and the lack of a dominant OMS vendor, it would seem that FIX would seem a natural choice. We, along with many others in the Korean market, would welcome this progress.

KRX – New Developments in 2008
Upgrading of Trading System of the Mongolian Stock Exchange
The KRX and Mongolian Stock Exchange (MSE) have signed an agreement to upgrade the MSE’s trading infrastructure. This agreement built on a 2006 commitment to expand bilateral ties, including the promotion of listing Mongolian companies on the KRX.

Establishment of a stock exchange in Cambodia
On January 22, 2008, the KRX signed an agreement to establish Cambodia’s first stock market in 2009. Under the joint venutre, the Cambodian government will own 55% of the new exchange, while the KRX will hold 45%. While it is one of the world’s poorest countries in the world, Cambodia has posted annual economic growth averaging 11 percent over the past three years owing to the strong garment and tourism sectors.

Introduction of a market maker system
To enhance the growth of interest rate derivatives, in February 2008 the KRX entered into the market maker agreement for 10- year KTB futures with nine futures trading members. A market maker is obliged to submit bid and ask quotes for the product, thus providing better liquidity.

Launch of lean hog futures
In July 2008, the KRX introduced lean hog futures, Korea’s first agricultural commodity derivatives, to help pig farmers and investors manage the price volatility and associated risks. Annual hog production in Korea is worth some KRW 3.6 trillion (USD 3.55 billion). After rice, the hog or pork market is the second largest agricultural product market in Korea and the price volatility was high at 27% in 2007, compares with the KOSPI at 23%.

Reclassification of Korea to Developed Status by FTSE
On September 18, 2008, the FTSE Group announced its decision to reclassify Korea from “Advanced Emerging” to “Developed” in its global equity index series in September 2009. The FTSE’s decision implies that the global market participants have accepted that the laws and regulations of Korean capital market are consistent with the global standards.

Agreement for Cross-Listing of KOSPI200 Futures on Globex
In November 2008, the KRX and CME Group reached an agreement to list KOSPI200 futures on the CME’s Globex Platform from September 2009. This cross-listing allows global investors to access and trade KOSPI200 futures 24 hours a day. While the orders are executed on the Globex platform of CME Group, the clearing and settlement of trades will be carried out by the KRX.

Development of a financial commodity trading system for Bursa Malaysia
The KRX was the successful bidder for the development of the Islam commodity trading system (CMH) of the Bursa Malaysia on October 2008. In September 2007, the KRX received the Bursa Malaysia’s order for the development of market-maker system. The KRX expects that the development of CMH of the Bursa Malaysia will open up the opportunity to export the KRX’s market systems to other Islam countries, including the countries in the Middle East.

Agreement to list daily futures on KOSPI200 options on Eurex
The KRX and Eurex, the European derivatives exchange, signed an agreement to trade daily futures on KOSPI200 options on the Eurex in December 2008. Daily futures on KOSPI200 options will be traded and settled on the Eurex during the nighttime in Korea (i.e., 17:00 – 05:00). It is expected that this crossborder trading arrangement, to be completed by January 2010, will allow investors to manage the risks associated with spot and derivatives positions and promote the participation of foreign investors in the KRX’s Derivatives Market.

Source: KRX Factbook 2008