[THE VIEW]Launch of Alternative Exchange: The Two Sides of a Divided Stock Market

Extended Trading Hours Bring New Investment Opportunities
Key Points for Investors in the Era of Alternative Exchanges

Earlier this month, a new alternative exchange called 'NextTrade' was launched, ending the Korea Exchange's monopoly. A wave of competition has begun to blow through the domestic securities market, which boasts active trading volumes. It is necessary to examine why a new exchange has emerged and what points investors should pay attention to.

Despite many market participants and active trading volumes, the Korea Exchange held a monopolistic position in Korea. Monopoly causes inefficiency and lack of innovation in any industry. NextTrade has already offered lower trading fees than the Korea Exchange, providing tangible benefits to investors. This is the first visible achievement of a competitive system.

Looking at global markets, multiple exchange systems are already common. In the United States, starting with the New York Stock Exchange established in 1792, there is Nasdaq, launched in 1971 and focused on technology stocks; NYSE American (formerly AMEX), optimized for small and medium-sized enterprises with low listing costs; and IEX, which aims for fair trading by reducing advantages for high-frequency traders. Each exchange operates with its unique characteristics.

Multiple exchanges are also successfully operated in Europe and Japan, where each exchange provides differentiated services and trading methods, enhancing market diversity and efficiency. These advanced cases will serve as valuable references for our market.

Extended Trading Hours, New Opportunities

NextTrade is particularly attracting attention from individual investors due to its extended trading hours. While the Korea Exchange has limited trading hours from 9:00 AM to 3:30 PM, NextTrade allows trading from 8:00 AM to 8:00 PM. This enables office workers to engage in investment activities even after work.

Generally, after-hours trading is known to carry higher risks due to lack of liquidity. Price gaps between bids and asks widen, price reflection of information is delayed, and indirect trading costs may occur. However, in the domestic market with a high proportion of individual investors, especially for popular stocks, these concerns are expected to be minimal.

Moreover, if corporate disclosures occur outside regular hours, previously investors had to wait until the next trading day, but now immediate price reflection is possible within NextTrade's extended trading hours. This is a clear advancement in terms of market efficiency.

Challenges of a Split Market

The challenges arising from the split stock market cannot be ignored. If there is a price difference between the two exchanges, placing an order on a designated exchange may cause investors to miss better prices on the other exchange.

To prevent this, a 'best execution obligation' system has been introduced, but due to time lags in the order transmission process, it is not a perfect solution. High-frequency traders using high-performance algorithms and fast networks exploit these gaps to generate profits.

Additionally, trial and error may still occur during the system implementation process of the new exchange. In fact, on March 18, a market-wide suspension occurred for about seven minutes due to a mid-session system failure. Analysis revealed that a system collision caused by NextTrade's midpoint quotes was the cause. This is an aspect that investors should carefully monitor during the transition to a competitive system.

Professor Park Sung-kyu, Willamette University, USA