Since a multiple-exchange system was introduced in the domestic market, the gap in fees paid by 10 major securities firms to the two main exchanges—Korea Exchange (KRX) and the alternative exchange NextTrade (NXT)—has been shrinking rapidly, data showed. At some securities firms, the total fees paid to NextTrade reached about half of those paid to Korea Exchange.
As the alternative exchange has quickly taken hold, Korea Exchange is reviewing fee cuts and longer trading hours. The introduction of a multiple-exchange system is seen as addressing issues stemming from Korea Exchange's monopoly. However, NextTrade is not a formal alternative trading system (ATS) and is subject to a rule that its average daily total trading volume must not exceed 15% of Korea Exchange's volume.
According to materials provided by the Financial Supervisory Service to People Power Party lawmaker Lee Heon-seung of the National Policy Committee on the 15th, from May to Aug., the average monthly fees paid by the top 10 domestic securities firms—Shinhan, Meritz, Hana, Kiwoom, Daishin, Mirae, NH, Hantu, Samsung, and KB—to NextTrade were 23.1% of those paid to Korea Exchange.
At some securities firms, the transaction fees paid to NextTrade chased up to as high as 45% of those paid to Korea Exchange. The multiple-exchange system began in Mar. NextTrade started full-fledged operations in May, the third month after entering the market, by collecting transaction fees.
NextTrade's market share is rising at a fairly steep pace. In May, when NextTrade began charging fees in earnest, fees at Korea Exchange totaled 17.228 billion won and fees at NextTrade were 2.722 billion won, leaving NextTrade's share at about 15.8%.
But in Aug., 20.128 billion won and 5.843 billion won were paid to Korea Exchange and NextTrade, respectively, pushing NextTrade's fee share to 29% of Korea Exchange's. In about three months, the gap narrowed by nearly half.
The expansion in the alternative exchange's market share is due to the smart order routing (SOR) best-execution system. It automatically executes orders on the exchange most favorable to investors between the two exchanges; when trades occur at the same price, orders go to NextTrade, which has lower fees.
Korea Exchange imposes a flat fee of 0.0023% on stock transactions, while NextTrade sets lower rates of 0.00134% to 0.00182% depending on the order method.
Because of this, there was a securities firm that paid an average of 292 million won per month in fees to Korea Exchange and 132 million won to NextTrade. The fees paid to NextTrade amounted to 45.2% of those paid to Korea Exchange.
By contrast, there were places where NextTrade's share was as low as 1.9%. Regular-session trading on NextTrade began in Aug. Differences arose among securities firms depending on how many shares they brokered in the premarket and after-market, where trading volume is relatively small.
As the multiple-exchange framework has taken hold relatively successfully, Korea Exchange is also reviewing fee cuts. If Korea Exchange lowers its fees to NextTrade's level, it appears it could somewhat resolve the disadvantages it faced under the existing SOR system. However, Korea Exchange says fee cuts are still under review.