[Viewpoint] Time to Actively Consider Alternative Trading Systems

Professor Hee-Jun Ahn, School of Business, Sungkyunkwan University

Recently, discussions have been underway in South Korea regarding the establishment of Alternative Trading Systems (ATS) built with the participation of securities companies as alternatives to the existing exchange market. Alternative trading systems, also known as "multi-asset trading matching systems," do not perform listing or market regulation functions like exchanges but only handle securities trading functions, allowing trading in a more flexible environment beyond the framework of existing markets. In advanced markets, alternative trading systems have long been established and handle about 5% to 20% of total trading volume. For example, in countries such as the United States, Canada, Japan, and Australia, alternative trading systems like Chi-X, Bats, Japannext, and TMX actively compete with existing exchange markets and over-the-counter markets.

As a country with one of the world's top 10 largest securities markets, South Korea also needs to carefully consider the introduction of alternative trading systems to build a more advanced capital market infrastructure and strengthen competition. The advantages of alternative trading systems include reduced trading costs, improved trading speed, extended trading hours, and expanded order types, leading to the advancement and diversification of trading techniques.

Among these, the reduction of trading costs is possible through the effect of decreased spreads due to increased liquidity. However, the domestic stock market has already maintained relatively low spreads compared to overseas markets for a long time, so a significant reduction is difficult to expect. Nevertheless, additional trading cost reductions can be anticipated through midpoint matching, enabling trading at improved prices and thereby enhancing the efficiency of price discovery.

Meanwhile, as high-frequency trading (HFT) increases in the future, trading speed will become increasingly important. The movie "The Hummingbird Project" vividly illustrates how securities firms compete fiercely to gain an edge by building faster network computer systems for ultra-fast trading, demonstrating how crucial speed is in securities trading. Improved trading speed through alternative trading systems can greatly contribute to enhancing the qualitative infrastructure of the market.

Extended trading hours are also a factor welcomed by investors. Currently, the Korea Exchange’s trading hours run from 9:00 a.m. to 3:30 p.m. If trading hours are significantly extended through alternative trading systems, trading will be possible without time constraints, which would be welcomed by retail investors.

Compared to the order types allowed by major overseas exchanges such as the New York Stock Exchange, the types of orders available to investors through the Korea Exchange are somewhat limited. Expanding order types through the introduction of alternative trading systems would allow investors to implement more diverse investment strategies, which can help advance trading techniques.

The aforementioned advantages of alternative trading systems can serve as an opportunity to further develop the Korean stock market by expanding trading opportunities and increasing overall market liquidity through the advancement of market infrastructure. However, since regulations are not as stringent as those in existing exchange markets, issues such as trading transparency and conflicts of interest may arise. Therefore, during the preparation process for introducing alternative trading systems, it is necessary to establish efficient institutional measures that maximize benefits while minimizing side effects by learning from the operational cases of advanced overseas markets.

If the introduction of alternative trading systems leads to the establishment of a more competitive and efficient trading infrastructure, increased overall market liquidity, and improved price discovery efficiency, it will not be a matter of dividing the market share monopolized by the Korea Exchange but rather expanding the overall market size, resulting in positive effects of market growth and development. It is hoped that this will provide an opportunity for the Korean securities market to take a further leap forward.