Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
An upstart challenger to South Korea’s main bourse has drawn legions of risk-loving traders, capturing nearly a third of the market in just months and propelling the country to become the world’s best-performing major equities market this year.
Nextrade launched in March to break the Korea Exchange’s 70-year monopoly on equities trading and advance the country’s capital markets. By November, it was handling nearly a third of turnover by value in South Korea’s $2.4tn in stocks. Daily trading value topped Won11tn ($7.4bn), about double that of Singapore Exchange, according to Nextrade.
The alternative platform has appealed to South Korea’s amateur investors, who are known for their aggressive trading strategies and high risk tolerance. They have become a dominant force in the local stock market, fuelling the main index’s gains of 75 per cent this year.
Domestic retail investors accounted for 85 per cent of Nextrade’s trading value, compared with 10 per cent for foreigners and 5 per cent for domestic institutions. The exchange has been popular among white-collar workers for its longer hours — 12 compared with KRX’s six and a half, allowing them to trade during commutes — and fees that are 20 to 40 per cent lower.
Kim Hak-soo, Nextrade’s chief executive, called its rapid growth “exceptional”, especially when compared with peers in other countries. “It took about 10 years for other alternative exchanges in countries like Japan and Australia to reach our level of trading volume,” he told the Financial Times.
In the US, about 80 alternative platforms handle 20 per cent of total trading volume, while three such exchanges in Japan make up about 10 per cent of the turnover, according to South Korea’s Financial Services Commission.
“Retail investors in Korea are very dynamic,” said Kim. “They have no resistance against new systems or technology.”
Nextrade’s rapid growth has concerned regulators, who introduced rules at the end of October to limit its trading volume to 15 per cent of KRX’s.
Unlike KRX, Nextrade, which is collectively owned by the Korea Financial Investment Association trade group and local brokers, is involved in stock trading only. It does not engage in listings, regulatory disclosures, clearing or monitoring.
To meet the new rule, the platform had to halt trading of some popular stocks such as Kakao, Kepco and Mirae Asset to reduce its volume. About 630 stocks are now traded on the exchange, down from nearly 800 at its start. By comparison, 2,800 stocks are traded on KRX.
Kim questioned the rule’s rationale and said the ceiling should be eased for fair competition in the long run. Nextrade said authorities should entrust an independent third party with clearing and monitoring as in other advanced markets.
“There are similar rules in Japan, but ours are stricter,” said the former financial regulator. “Authorities are aware of the problems and are likely to review the rules for change over time.”
Nextrade’s popularity has put KRX on alert. The main bourse has temporarily lowered fees and is considering expanding trading hours to protect its market share.
In order to differentiate further from KRX, Kim is trying to introduce digital tokens linked to K-pop song licences, as well as leveraged and inverse exchange traded funds. The platform recently formed a tie-up with Musicow, a marketplace that trades securitised music royalties.
“Think about how much interest trading digital tokens of BTS songs will draw, given the strong K-pop fandom at home and abroad,” said Kim. “K-culture is one of our country’s most powerful industries that has not been tapped much by equity investors.”
Nextrade is preparing to list “riskier” ETF products in the second half of next year to lure more domestic investors who have piled into US markets for quick returns.
South Korean investment in US equities rose more than 50 per cent this year to a record $161bn at the end of November, according to the Korea Securities Depository.
“We need more attractive products to induce more inbound investment flows,” said Kim.
Kang Sohyun, a researcher at the Korea Capital Market Institute think-tank, wrote in a report earlier this year that Nextrade had “materially contributed” to an overall increase in trading value in South Korea’s stock market by bolstering liquidity.
The constraint on Nextrade’s market share, she said, “risks undermining the original policy intent of introducing a multimarket system, which is to foster competition and drive structural improvement in the trading ecosystem”.