[Click eStock] "Increase in ETF Investment Affects Domestic Stock Market Microstructure"

Hanwha Investment & Securities analyzed in its report "Microstructure of the Korean Stock Market" on the 15th that "the increase in ETF investment is affecting the microstructure of the domestic stock market."

The assets under management of domestic listed ETFs grew from 24.2 trillion KRW in 2016 to 173.5 trillion KRW by the end of 2024. The reason for increasing ETF investments is due to advantages in costs and taxes. Individuals sold stocks and bought ETFs for asset diversification, while banks did so to reduce transaction costs.

Financial investments have been buying stocks every year since 2017, except for the year 2020. Looking only at listed stocks, the reason is unclear, but when connected with ETFs, the trading structure becomes visible. Financial investments act as ETF liquidity providers (LPs), selling (issuing) ETFs and using the proceeds to net buy stocks, which are then transferred over-the-counter to investment trusts managing the ETFs.

Financial investments and foreigners have also increased ETF arbitrage trading. Since liquidity providers like financial investments do not pay transaction taxes, they can exploit the difference between the ETF market price and net asset value for arbitrage. The increase in stock futures trading also impacts the microstructure.

The growth of the IPO market has increased stock market trading by other financial entities represented by private equity funds and venture capital. Their selling patterns are particularly prominent in the KOSDAQ market. The reason they can sell without buying stocks is that they have accumulated stocks in the unlisted market and over-the-counter. As funds invested in unlisted stocks grow larger, understanding the trading patterns of private equity funds and other financial entities can help identify the appropriate buying timing in the listed market.

Researchers Seungyoung Park and Suyeon Kim of Hanwha Investment & Securities stated, "Each participant in the stock market buys and sells stocks for their own rational reasons," adding, "It is not only macro variables like the economy and liquidity that move the market. Understanding the diversified drivers is necessary to comprehend the movements of the stock market."