South Korean institutional investors have wasted hundreds of billions of won in trading costs by paying little attention to cost minimization. Experts point out that this is mainly because of the lack of competition in stock trading systems rather than the institutional investors’ indifference.
At present, South Korea’s stock trading systems are based on monopoly and, as such, local institutional investors are insensitive to ensuring that stock trading is executed at prices most favorable for investors. On the other hand, in the United States and Europe, where alternative trading systems have developed since the 1990s, trading is carried out at multiple stock exchanges and a number of brokers are providing various fee incentives and related services to attract more institutional investors. They became even more sensitive to cost reduction after the recent global financial crisis.
Alternative trading systems are not official stock exchanges yet function as stock exchanges executing trading between trading parties. As a matter of course, investors tend to prefer the faster, less expensive and more convenient alternative systems if the same stocks can be traded on both official stock exchanges and alternative systems.
The Better Alternative Trading System (BATS) established in Kansas in 2005 has been praised as an innovator in the NYSE- and NASDAQ-led oligopolistic U.S. stock market. In 2015, the NYSE and the NASDAQ accounted for only 23.8 percent and 17.9 percent of the total trading volume of the U.S. stock market, respectively. Meanwhile, the BATS boosted its share to 21.2 percent in 10 years. In addition, the BATS entered Europe in 2008 and raised its share to 22.93 percent in eight years to become the largest stock exchange in Europe. A notable point is that the combined share of other trading venues exceeds the share of the BATS by about one percentage point.
If South Korea maintains its backward systems, the South Korean stock market will become more and more vulnerable to foreign manipulators. These days, the competition-based trading and efforts for trading cost minimization are leading to the evolution of algorithm trading and high-frequency trading as seen in the example of Citadel Securities. The Korea Exchange is currently considering imposing restrictions on the American company regarding its alleged KOSDAQ market disturbance in 2018.