Shrunken Bourse
An increasing number of investors are leaving the stock market, as economic uncertainties linger on and the preference for risk-free assets is on the rise. The daily average trading value dropped from approximately 6.9 trillion won (US$6.65 billion) to 4.8 trillion won (US$4.6 billion) between 2011 and last year.
The volume reached a trough at 4.19 trillion won (US$4.04 billion) in the fourth week of December 2013, and totaled 5.5 trillion won (US$5.3 billion) in January this year. The latter figure is the lowest for any January since 2007. The ratio of orders to actual transactions dropped along with it to 39.83 percent last month, which is also the lowest since the first collection of the statistics in 2003.
The downward spiral can be attributed to the profit generating structures of local securities companies that are very vulnerable to stock market slumps. According to the Financial Supervisory Services, brokerage commissions account for 62.43 percent of the combined fee income of the 10 major stock firms in Korea, and the excessively high dependence has weakened the structures. The cut-throat competition among them is compounding the problem, too.
Another reason is the profit structures that are not much different between leading and smaller stock firms. “The similarity between the two groups signifies that they have a far way to go for specialization and efficiency,” said an anonymous industry source.
Some watchers also point out that the most fundamental cause is the weak capital strength of the firms. According to the Korea Capital Market Institute (KCMI), leading Korean securities companies have equity capital of about 3.6 trillion won (US$3.5 bilion), which is 1/21st of Goldman Sachs and 1/8th of Nomura Securities. The vulnerability has also affected personnel productivity. Korean stock firms’ net operating profits per employee is just 20 percent of that of Goldman Sachs, and 30 percent of Nomura Securities.
“Those bigger securities firms in Korea have failed to act as market leaders due to their substandard capital strength,” KCMI researcher Lee Seok-hoon explained, adding, “Major investment banks have to be capable of high value-added sales based on large capital and investment in overseas networks, with the capital market globalizing itself at a rapid pace, but the Korean players appear to fall much behind in these aspects.”