Korea Investment & Securities decided to lower the commission on stocks executed on the Alternative Trading System (ATS) NextTrade by 0.001 percentage points compared to orders fulfilled on the Korea Exchange. Other securities firms are also expected to announce the trading commissions applicable to NextTrade this month, which is likely to be set at a similar level to that of Korea Investment & Securities.
At first glance, the difference in commissions applied between the two exchanges appears minimal; however, as the best execution obligation process unfolds, the revenue for the new participant NextTrade could swell to several hundred billion won.
According to the financial investment industry on the 17th, Korea Investment & Securities decided to unify the stock trading commission rates that had differed by transaction amount starting from the 4th of next month. However, when orders are executed through the Korea Exchange (on an online basis), a commission of 0.147% will be applied, while a commission of 0.146% will be applied when executed on NextTrade. The stock trading commission rate has been significantly adjusted in line with the upcoming launch date of NextTrade next month.
Similarly, the difference in commission rates for offline transactions between the two exchanges (Korea Exchange 0.491%, NextTrade 0.49%) is 0.001 percentage points.
Other securities firms are also expected to announce their commission rates for NextTrade within this month. Industry insiders anticipate that securities firms will set their commissions for NextTrade even lower than those of Korea Investment & Securities. The commissions of NextTrade are up to 40% lower than those of the Korea Exchange, as financial authorities instructed that these commissions should reflect the price differences between exchanges when securities firms pass the costs onto investors.
However, the commission difference between the two exchanges is only 0.001 percentage points, which feels negligible to investors. For instance, if an investor orders stocks worth 100,000 won through the Korea Investment & Securities mobile trading system (MTS), the commission would be 147 won if the order is executed on the Korea Exchange, while it would be only 146 won on NextTrade. This equates to a 1 won difference per 100,000 won.
However, from the exchange's perspective, this difference is significant. Even a slight reduction in transaction costs is essential to attract orders to their own volumes. Unless investors choose the exchange, securities firms analyze investors' orders to determine which exchange offers a competitive advantage. Here, the criterion for 'advantage' is overall pricing.
From an order-specific viewpoint, when buying, orders should be placed where the total expense (price per share * number of shares purchased - transaction expense) is lowest, and NextTrade's commission is cheaper. Likewise, for selling, total pricing (price per share * number of shares sold - transaction expense) must be taken into consideration, where NextTrade holds an advantage in commission cost efficiency over the Korea Exchange. Therefore, for stocks that have the same price offers on both exchanges, there is a high likelihood that orders will go to NextTrade.
Consequently, the Korea Exchange is expected to be hit in terms of trading commission revenue. This business had been monopolized by the Korea Exchange, which also collected the entire trading commission, but will now have to share it with NextTrade. The high likelihood of orders flowing to NextTrade due to lower transaction costs presents a crisis for the Korea Exchange. Last year, the Korea Exchange's trading commission amounted to 382.5 billion won. By law, NextTrade can only receive up to 15% of the trading volume from the Korea Exchange, equating to approximately 57 billion won on a simple calculation basis.
Initially, NextTrade will start transactions with 10 stocks, but by April, it will expand to 800 stocks. Not only individual stocks but also transaction products like Exchange-Traded Funds (ETFs) will be broadened. Unless there are technical failures, NextTrade is expected to grow into a substantial competitor to the Korea Exchange. NextTrade aims to achieve a market share of 10% within three years.
A source in the financial investment industry noted, 'Compared to when the alternative trading system was first discussed, the Korea Exchange's attitude now is like night and day,' adding that there is anxiety over the potential breakdown of the monopolized competitiveness.
Meanwhile, when securities firms handle market orders, which are executed instantly matching the opposing orders, overall pricing takes precedence, but for volume creation orders that remain unexecuted due to the absence of matching opposing orders, the probability of execution should take priority.