Excessive Transaction Costs
South Korean institutional investors, including the National Pension Service (NPS), lost approximately 2.50 trillion won (US$2.16 billion) over the last five years due to their inefficient stock trading practices. They traded stocks without making an effort to reduce transaction costs, while foreign investors earned an additional profit by employing advanced techniques.
The combined market impact cost of domestic institutions, such as the NPS, pension funds, insurers, investment trusts and private equity funds, from 2014 to 2018 came to 2.46 trillion won (US$2.13 billion), according to a report released by the Korea Capital Market Institute (KCMI) on June 27. The figure for foreign investors totaled -730 billion won (US$631.76 million) over the same period.
Market impact cost is defined as the deviation of the transaction price from the daily average market price resulting from the transaction. Market impact costs are a type of transaction costs. Since there is a heavy volume of transaction, it is possible to sell and buy stocks at adverse prices. However, it means that domestic institutions had much lower efficiency in trading than foreigners.
In other words, institutions purchased stocks at higher prices than foreigners and sold them at lower prices, leading to an average annual asset loss of 500 billion won (US$432.71 million). If the NPS which invests more than 100 trillion won (US$86.54 billion) in domestic stocks cut down transaction costs by only 0.1 percent, it could have saved 100 billion won (US$86.54 million). However, a commission, the core element of transaction costs, gets only five out of 100 points according to the domestic stock consignment operator selection standard of the NPS.