[Exchange Competitiveness Assessment] ① From Monopoly to Competitive System After 70 Years

Monopoly Broken with the Launch of Korea's First ATS
Rapid Growth of NextTrade Since March Debut
KRX's Profitability Declined Last Year
Falling Behind in Competition with Major Global Exchanges

The Korea Exchange (KRX) has ended its 70-year monopoly system and entered a competitive environment. The conditions for the Korea Exchange, now in a competitive system, are challenging. Internally, it inevitably loses some market share due to the launch of NextTrade, Korea's first alternative trading system (ATS), and externally, investors' funds are flowing out to the U.S. stock market and the cryptocurrency market. While major global exchanges are expanding their business models through mergers and acquisitions (M&A) and entry into data businesses to diversify their revenue structures, the Korea Exchange is still lagging behind, cautious of financial authorities.

'70 Years of Monopoly' Broken at KRX

According to the Korea Exchange on the 15th, KRX's operating revenue last year increased by 3.0% year-on-year to 664.7 billion KRW. Although operating revenue increased due to higher transaction fee income, profitability declined. Operating profit decreased by 4.08% to 274.9 billion KRW, and net income fell by 13.8% to 280.8 billion KRW. This was due to increased operating expenses from system depreciation and development costs, as well as a 28.9 billion KRW decrease in non-operating income caused by financial costs rising from index declines and exchange rate increases in the second half of the year. Net income, which had exceeded 300 billion KRW since 2022, fell below that threshold last year.

It is not easy to be optimistic about a rebound in performance this year. The exchange, which enjoyed a monopoly position until last year, now faces competitors. NextTrade, launched last month, had an average daily trading volume of only 550,000 shares during April 4-14 when it traded 10 stocks, but in the week of March 31 to April 4, when the number of traded stocks expanded to about 800, the volume increased to 89.15 million shares. As of April 7, this accounted for 9.9% of the Korea Exchange's trading volume. Considering that Japan’s alternative trading system (PTS), introduced in 2000, only surpassed a 5% market share in 2012, this is a remarkable growth rate.

Major foreign countries already operate one or more alternative trading systems, with market shares ranging from 11% to 19%. The U.S., which began ATS construction in 1975, now has 65 alternative trading systems. Japan, whose situation is most similar to Korea’s with a high proportion of regular exchange trading, operates three alternative trading systems: Japan Next, Cboe Japan, and Osaka Digital Exchange (ODX). Korea is also expected to see a sharper decline in KRX trading volume if institutional improvements allow ETFs and ETNs to be traded on alternative trading systems and trading limits are relaxed.

Earlier, Jeong Eun-bo, Chairman of the Korea Exchange, mentioned at a February New Year press conference that "As ATS takes on a certain portion of the market related to agency brokerage, a partial reduction in KRX’s revenue model is inevitable."

Ongoing Capital Outflow Also a Concern

One of the Korea Exchange’s biggest concerns is liquidity decline. Last year, the domestic stock market showed underperformance compared to global markets due to overall index declines, reduced trading volume, and sluggish major sectors, leading to increasing capital outflows to overseas stocks and alternative assets. Especially, the outflow of young investors who entered during the pandemic has reduced net domestic stock purchases, with investment demand dispersing into U.S. stocks and virtual assets. In fact, the proportion of domestic stock holdings by investors under 30 declined consecutively in 2022 and 2023, and while domestic investors net purchased 15 trillion KRW in U.S. stocks last year, they net sold 2 trillion KRW in domestic stocks.

After a strong start to the year, the average daily trading value has been declining again since last month. The average daily trading value was 21 trillion KRW in June last year but dropped to 15 trillion KRW in December due to continued market weakness in the second half of last year. This year, it rose to 16 trillion KRW in January and 21 trillion KRW in February but fell to 17 trillion KRW in March, and currently stands in the 14 trillion KRW range.

Professor Lee Jun-seo of Dongguk University’s Department of Business Administration said, "It is not easy to discuss the Korea Exchange’s competitiveness alone. It should be discussed together with capital market policies, investor tendencies, and characteristics. Nevertheless, if we evaluate KRX’s competitiveness, it can be considered about half and half. Competitive areas include the number of listed companies, trading system stability due to IT development, and the index derivatives market. On the other hand, areas lacking competitiveness include a shortage of new products such as Security Token Offerings (STO), various ETFs, and Closed-End Funds (CEF), information monopoly, foreign investor regulations, insufficient market surveillance functions, governance, and inadequate overseas expansion."

Although the Korea Exchange shows steady growth in operating revenue, it is still far from standing shoulder to shoulder with leading overseas exchanges such as the New York Stock Exchange (NYSE), Nasdaq, London Stock Exchange (LSE), and Japan Exchange Group (JPX). Researcher Lee Hyo-seop of the Korea Capital Market Institute explained, "These overseas exchanges have undergone demutualization (becoming publicly listed private companies) and are strengthening profitability and growth by attracting IPOs in the global market, listing innovative derivatives, index businesses, content businesses, IT solutions, and diversifying their businesses. Compared to these exchanges, the Korea Exchange still lacks competitiveness."