Chi-X Global and SBI Japannext set sights on South Korea; South Korea is the third-largest equities market in the region after China and Japan by volume

August 9, 2013 Leave a comment

August 8, 2013 12:33 pm

Chi-X Global and SBI Japannext set sights on South Korea

By Jeremy Grant in Singapore and Simon Mundy in Hong Kong

South Korea is set to become the third Asian equities market to open to competition between exchanges and upstart trading venues after Chi-X Global and SBI Japannext, both backed by large banks, said they were exploring entering the country. The moves are a sign that the breaking of longstanding national exchange monopolies and equity market fragmentation – a trend that has swept Europe in the past six years – is gathering pace in Asia. Japan Exchange, formed from the recent merger of the country’s two largest bourses in Tokyo and Osaka, already competes with Chi-X and SBI Japannext in share trading. Australia’s ASX faces off against Chi-X Australia. South Korea is the third-largest equities market in the region after China and Japan by volume, and it offers trading in some of the most liquid stocks such as electronics maker Samsung.In May the Korean markets regulator, the Financial Services Commission (FSC), proposed revisions to the financial services act that would for the first time allow the establishment of an “alternative trading system”, or ATS.

This would be a direct challenge to the share trading monopoly long enjoyed by KRX, the country’s exchange.

The proposed rules set a maximum ownership in an ATS of 15 per cent. That has prompted discussions between SBI Japannext and the country’s top brokers, as well as between Chi-X Global and most of the same brokers, about setting up at least one ATS.

“We are actively assessing the opportunity, but it’s still early days,” said Tal Cohen, chief executive of Chi-X Global. “Korea is one of the large markets in Asia, and it is trying to open itself up. What we want to do is work with the local firms to showcase what we can bring to the table.”

Chi-X Global is owned by a consortium consisting of Nomura, Goldman Sachs, UBS, Morgan Stanley, Bank of America Merrill Lynch, Getco and QuantLab, two US-based electronic trading firms.

Chuck Chon, co-chief executive of SBI Japannext, said: “We are actively engaged with the top eight brokers, and we have approached them with our proposal to bring our successful formula developed in Japan and to launch with consortium partners in Korea.”

SBI Japannext is controlled by SBI Holdings – a financial holding company that owns SBI Securities, Japan’s largest online broker – and Goldman Sachs. The rest is held by Bank of America Merrill Lynch, Credit Suisse and Rakuten Securities, another Japanese online broker.

The FSC said: “The introduction of ATS is expected to enhance overall efficiency of capital markets by bringing about competition to trading business, as well as establishing trading system in which diverse market needs are well reflected.”

However, industry executives said a high local transaction tax, coupled with a proposed cap on market share and a minimum capital requirement for any ATS operator, would act as deterrents to anyone entering in the short term.

The FSC has discussed capping any ATS market share at 5 per cent. Such caps are rare, with a 10 per cent cap in Japan. Operators of alternative trading systems there have been lobbying for it to be raised. No cap exists in Australia.

The FSC has also proposed a minimum capital requirement for any ATS operator of Won20bn ($18m).

Such a capital requirement would make it difficult for any ATS to reach break-even, given financial incentives – such as fee discounts – typically offered to traders by alternative trading systems to attract customers.

“From the standpoint of an ATS operator deciding whether to set up in Korea, the [cap] would obviously affect your decision about whether it’s feasible or reasonable [to set up in the market],” said Nick Ronalds, head of equities at the Asia Securities Industry & Financial Markets Association, which lobbies on behalf of banks and brokers.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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