[The Era of Multiple Exchanges] Exchanges and Securities Firms Also Busy... Accelerating System Development

Securities Firms Developing SOR Systems and Order Media
Importance of SOR Construction for Best Execution Obligation
Efforts to Minimize Customer Confusion
Exchange Preparing for Competitive System with Competitiveness Enhancement and Infrastructure Development

NextTrade, the first Alternative Trading System (ATS) in Korea, is set to launch in March next year, prompting securities firms to accelerate preparations such as system development. The Korea Exchange (KRX), which will face competition for the first time in about 70 years with the launch of NextTrade, is also speeding up the construction of related infrastructure while preparing for the impact of competition.

Korea Exchange, Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

According to the financial investment industry on the 30th, securities firms have been busy building Smart Order Routing (SOR) systems and developing related systems ahead of the ATS launch.

SOR is a system designed to automatically fulfill the best execution obligation. The best execution obligation, under the Capital Markets Act, requires securities firms to execute customer orders under the most favorable conditions. Securities firms must process orders under the most advantageous terms for customers by considering factors such as price, fees, execution speed, and trading execution methods. Therefore, building an SOR system that ensures orders are executed under optimal conditions is essential. Securities firms can choose to use SOR systems developed by Koscom or NextTrade by paying usage fees. About ten securities firms, including NH Investment & Securities, Shinhan Investment Corp., Toss Securities, Kakao Pay Securities, and LS Securities, are known to have adopted or are negotiating to adopt Koscom’s system. Mirae Asset Securities, KB Securities, Korea Investment & Securities, and Samsung Securities plan to use NextTrade’s SOR. Some securities firms are developing their own systems. Kiwoom Securities is the only one among the 23 securities firms participating in NextTrade that is developing its own SOR system.

A representative from a major securities firm said, "Development of integrated quotes, SOR, and order media (HTS, MTS) is underway, and our own system will be updated in line with the ATS implementation schedule," adding, "We are focusing most on building an SOR that enhances customer trading convenience and competitiveness."

In particular, securities firms plan to thoroughly prepare for potential customer confusion due to institutional changes. Another representative from a large securities firm said, "Differences in trading hours between the two markets, differences in order types allowed, introduction of new order types such as midpoint and stop limit orders, and changes to existing media systems are expected to cause considerable confusion during the initial phase," adding, "We are paying special attention to minimizing customer confusion caused by institutional changes."

Regarding the ATS launch, securities firms emphasized the need for detailed guidelines from regulatory authorities. Although the financial authorities announced guidelines on the best execution obligation for securities firms at the end of last month, there is a view that more specific policies are necessary. A securities firm representative said, "While a general guideline for the system was provided, specific guidelines were delegated to each securities firm, so different standards are expected to be applied by each firm," adding, "Since this affects the foundation of order and investment information, providing detailed guidelines is necessary to minimize stress exposure for both securities firms and customers." Another securities firm representative said, "While excessive guidelines should be avoided to allow autonomous competition among securities firms, it is necessary to clarify legal compliance requirements so that mandatory legal obligations are strictly followed."

The Korea Exchange, which is transitioning from a monopoly to a competitive system for the first time in 68 years, is also actively preparing. At the end of May, KRX announced a bid for the 'Infrastructure Introduction and Construction Project for ATS Response' and began building infrastructure and security environments for data transmission between the exchange and ATS systems. The exchange plans to establish an integrated market management system to protect investors in line with the ATS launch. It will enable real-time transmission of information such as trading halts and circuit breakers to ATS and establish a short-selling management system, including designation of overheated short-selling stocks. Additionally, it plans to introduce new order types such as midpoint orders to meet diverse demands and improve investor trading convenience by reducing the minimum price unit for orders. The exchange is also actively working to strengthen competitiveness. To enhance business competitiveness, it has established a Future Business Division to promote index and data businesses, expand the index lineup, and diversify Exchange-Traded Products (ETPs). A KRX official said, "Since ATS will compete by offering low fees, the exchange will also be fully prepared to respond to the competitive environment."