Upload
aleta
View
45
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Enhancing the Competitiveness of Korea’s Securities Exchanges. Hana Institute of Finance President Heungsik Choe. Table of Contents. I. Overview of Securities Exchanges and Alternative Trading Systems. II. How Conventional Exchanges Are Responding to the Rise of ATSs. - PowerPoint PPT Presentation
Citation preview
■| 1
Enhancing the Competitiveness of Korea’s Securities Exchanges
Hana Institute of FinancePresident
Heungsik Choe
Table of Contents
I. Overview of Securities Exchanges and Alternative Trading Systems
II. How Conventional Exchanges Are Responding to the Rise of ATSs
III. How ATSs Are Responding to the Evolving Exchange Sector
IV. Growing Competition Between Exchanges and ATSs
V. How Korea’s Exchange Sector Can Stay Competitive
Exchanges ensure that orders are executed and transactions
settled in the fastest possible way.
Exchanges ensure that orders are executed and transactions
settled in the fastest possible way.EfficiencyEfficiency
Exchanges help investors make informed, intelligent decisions
by ensuring that information is disclosed in a timely, complete
and accurate manner.
Exchanges help investors make informed, intelligent decisions
by ensuring that information is disclosed in a timely, complete
and accurate manner.
TransparencyTransparency
FairnessFairness
Provide markets for securities trading
Enable efficient price discovery
Establish rules for fair trading practices
Regulate the trading activities of members
Overview of Securities ExchangesOverview of Securities Exchanges
Purpose Purpose
Functions Functions
Purpose Purpose
Functions Functions
Exchanges ensure that no investor has an unfair advantage
over other market participants.
Exchanges ensure that no investor has an unfair advantage
over other market participants.
| 3
Separates ownership and membership
Makes it easier to provide optimal services
Paves the way for exchange consolidation
Demutualization and ListingDemutualization and Listing
M&A, Strategic Alliances and Partial AcquisitionsM&A, Strategic Alliances and Partial Acquisitions
Late-1990s to Mid-2000’s: Developments in the Exchange Sector Set the Stage for Key Regulatory Changes in 2007
Demutualization and Listing of Numerous ExchangesDemutualization and Listing of Numerous Exchanges
Helps achieve economies of scale and scope
- Creates financial, operational and managerial synergies
Gradual Progression
| 4
Major Forces of Change in the Exchange IndustryMajor Forces of Change in the Exchange Industry
Enabled the emergence of new low-cost entrants:
Enabled the emergence of new low-cost entrants:
Increased need for conventional exchanges to
restructure
Low Trading CostsLow Latency
Technological Innovation
US: Reg
NMS
EU: MiFID
Globalization
Regulatory Reform
Liberalizationof capital flows
IT
Falling Market SharesFalling Margins
ATSs (MTFs)
I-Bank Internalizers (SIs)
| 5
Established in 2007 by the SEC
A series of initiatives designed to modernize and strengthen the national market system for equity securities.
Reg NMS(Regulation National Market System)
Reg NMS(Regulation National Market System)
Europe’s analogue to Reg NMS; Effective starting in Nov 2007
Cornerstone of the EC’s Financial Services Action Plan aimed at increasing competition and consumer protection in investment services
MiFID(Markets in Financial Instrument Directive)
MiFID(Markets in Financial Instrument Directive)
Order Protection (or Trade Through) Rule
-Aims to guarantee best price execution
Access Rule
-Addresses fair and nondiscriminatory access to price quotations
Sub-Penny Rule
-Establishes minimum pricing increments to address the practice of “stepping ahead”
Market Data Rule
-Promoting the wide availability of market data and allocating revenues to the most useful data
Harmonizes regulations of member states to better protect investors
-Client categorization and client order handling
Enhances transparency by requiring the provision of sufficient trading data
- Pre and post-trade transparency
Requires best execution
-Assuring the best possible result including cost, spread and likelihood of execution as well as execution price
Treats Systematic Internalizers (SIs) as mini-exchanges
Alternative Trading Systems (ATS)
Systematic Internalizers (SI)
Alternative Trading Systems (ATS)
Systematic Internalizers (SI)
Multilateral Trading Facilities (MTF)
Systematic Internalizers (SI)
Multilateral Trading Facilities (MTF)
Systematic Internalizers (SI)
Regulatory Reforms Level the Playing Field Regulatory Reforms Level the Playing Field
| 6
Various non-exchange trading venues have been launched as alternatives to conventional exchanges; their predominant function is the matching of transaction counterparties.
ATS (US), MTF (Europe), PTS (Proprietary Trading Systems: Japan), Dark Pools, etc.
As of 2010, approximately 120 ATS were in operation.
ATSATS ExchangeExchange
Rapid order executionRequire few personnel but high-performance computing systemsLow costs of trading • Explicit costs: fees • Implicit costs: market timing costs and market impact costs
CompetitionCompetition
ComplementComplement
Listing & disclosure
Reduced impact of block trades
Overview of Alternative Trading SystemsOverview of Alternative Trading Systems
Characteristics Characteristics
Strengths Strengths
| 7
A sophisticated program trading platform that uses powerful computers to transact a large number of orders, a special class of algorithmic trading
Highly quantitative, uses computerized algorithms to analyze multiple markets and place orders based on market conditions
More sensitive to the execution speeds of markets
Positions held for a relatively short time and orders are often executed tens of thousands of times per day
-According to the Aite Group, HFT accounted for 73% of all US equity trading volume in 2009
Algorithmic Trading and HFT (Appendix) Algorithmic Trading and HFT (Appendix)
A type of automated trading that breaks up large blocks of shares into smaller ones to manage risk and reduce the market impact of large trades
Also known as algo trading, black box trading or robo trading
Use of electronic platforms with an algorithm deciding on timing, price, or quantity
Widely used by pension funds, mutual funds, and other buy side institutional traders and sell-side traders such as market-makers providing liquidity
Can be utilized in a variety of investment strategies, including market-making, arbitrage, or trend following pure speculation
Algorithmic TradingAlgorithmic Trading HFT (High Frequency Trading)HFT (High Frequency Trading)
| 8
ATSATS
Competition for
Survival
Competition for
Survival
US
- BATS- Direct
Edge• • •
Europe Asia
- Chi-X Europe
- BATS-Europe
- Turquoise• • •
- Chi-X Japan
- Chi-X East
• • •
Conventional Exchanges
Conventional Exchanges
Consolidation
System enhancements
Diversification
New Offerings
Consolidation
System enhancements
Diversification
New Offerings
Technological Innovation
Market Making
Statistical Arbitrage
Event Arbitrage
Algo Trading
HFT
Ongoing Battle to Attract Heavy Trading Volume Ongoing Battle to Attract Heavy Trading Volume
| 9
Source : WFE
* This average, computed on WFE members, has been weighted by the share of each member in
the total value share trading.
While the number of trades has exploded, the average value of trades has dropped significantly.
These phenomena have been largely due to the proliferation of HFT and algorithmic trading.
Major Changes in Markets (2000~2009) Major Changes in Markets (2000~2009)
Total number of trades in equity shares ⇒ +700%Total number of trades in equity shares ⇒ +700%
Weighted average value of trades -85⇒ %Weighted average value of trades -85⇒ %
| 10
Table of Contents
I. Overview of Securities Exchanges and Alternative Trading Systems
II. How Conventional Exchanges Are Responding to the Rise of ATSs
III. How ATSs Are Responding to the Evolving Exchange Sector
IV. Growing Competition Between Exchanges and ATSs
V. How Korea’s Exchange Sector Can Stay Competitive
M&A, Strategic Alliances and Partial Acquisitions
Acquisition and/or Establishment of ATS
Improvement of Trading Systems
Diversification of Business Models
How Conventional Exchanges Are RespondingHow Conventional Exchanges Are Responding
| 12
| 13
Achieve economies of scale and scope
Better utilize network externalities
→ Enhanced market power
Adapt to economic disturbances
Benefits of ConsolidationBenefits of Consolidation
As of 2011, most larger exchanges have been listed except for several Asian ones.
As of 2011, most larger exchanges have been listed except for several Asian ones.
From 2000 to 2009, securities
exchanges have engaged in 73
M&A’s, 237 strategic alliances and
68 partial acquisitions across the
globe.
From 2000 to 2009, securities
exchanges have engaged in 73
M&A’s, 237 strategic alliances and
68 partial acquisitions across the
globe.
1. M&A, Strategic Alliances and Partial Acquisitions
Ongoing Demutualization and Public Listings
Ongoing Demutualization and Public Listings
Since 2006, the spread of M&A has accelerated, with 80% of exchange M&A activity
concentrated in the period since then
- Such activity has coincided with the rapid expansion of ATS and HFT
- A majority of activity has been between stock exchanges and trading technology companies
M&A has been more active in Europe and North America than in Asia
- Asia’s capital markets are at differing stages of development
- Efforts to build an economic bloc in Asia have been slow
Type and Number of Mergers Between Exchanges Type and Number of Mergers Between Exchanges
Horizontal
- Two Stock exchanges (22)
- Two Derivatives, Fixed Income and Commodities
exchanges (8)
- Stock exchange + Derivatives, Fixed Income and
Commodities exchange (8)
- Two Clearing and Settlement Organizations (5)
Vertical
- Stock exchange + Clearing and Settlement
Organization (5)
- Stock exchanges + Trading Solutions Provider (18)
- Derivatives, Fixed Income and Commodities
exchanges + Trading Solutions Provider (5)
Type and Number of Mergers Between Exchanges Type and Number of Mergers Between Exchanges
Horizontal
- Two Stock exchanges (22)
- Two Derivatives, Fixed Income and Commodities
exchanges (8)
- Stock exchange + Derivatives, Fixed Income and
Commodities exchange (8)
- Two Clearing and Settlement Organizations (5)
Vertical
- Stock exchange + Clearing and Settlement
Organization (5)
- Stock exchanges + Trading Solutions Provider (18)
- Derivatives, Fixed Income and Commodities
exchanges + Trading Solutions Provider (5)
Exchange M&A Activity Between 2000 and 2009Exchange M&A Activity Between 2000 and 2009
By Economic AreaBy Economic Area
Intra-Regional
- Europe (25)
- North America (23)
- South America (2)
- Asia (15)
- Africa (2)
Inter-Regional
- Europe and North America (5)
- Europe and Asia (1)
By Economic AreaBy Economic Area
Intra-Regional
- Europe (25)
- North America (23)
- South America (2)
- Asia (15)
- Africa (2)
Inter-Regional
- Europe and North America (5)
- Europe and Asia (1)
| 14
Ten Largest Deals in the Exchange Sector in Europe and North AmericaTen Largest Deals in the Exchange Sector in Europe and North America
Completion
DateTarget Nationality Acquirer Nationality
Deal Value
(USD mil., excl. debt)
Jul. 07 CBOT US CME US 11,648
Apr. 07 Euronext Netherlands NYSE US 10,183
May 08 Bolsa de Mercadorias
& Futures – BM&F
Brazil Bovespa Brazil 8,975
Aug. 08 Nymex US CME Group US 7,909
Mar. 08 Omx Sweden NASDAQ US 4,003
Dec. 07 International
Securities Exchanges
US Deutsche Borse Germany 2,811
Oct. 07 Borsa Italia Italy LSE UK 2,617
May 08 Montreal Exchange Canada TSX Group Canada 1,070
Jan. 07 New York Board of
Trade
US International
Exchange Inc.
US 1,066
Mar. 07 Archipelago Holdings US NYSE US 884
Source : “Trading blocs”, PWC, Aug. 2011
(Mar. 06 ~ Mar. 11)
| 15
2. Acquisition and/or Establishment of ATS2. Acquisition and/or Establishment of ATS
Exchange Date Target Class Type with
NYSE Group Mar. 06 Archipelago ECN Acquisition
Jul. 06 MatchPoint Dark pool Acquisition
NYSE
Euronext
Jan. 09 NYBX Dark pool Establishment BIDS
Feb. 09 Smartpool Dark pool Establishment BNP Paribas,
HSBC, JP Morgan
Mar. 09 NYSE Arca Europe MTF Establishment
Aug. 09 NYFIX ATS Acquisition
Nasdaq Sep. 04 Brut ECN ECN Acquisition
Nov. 05 INET ECN Acquisition
Nasdaq OMX Jun. 07 Nasdaq Intra-day
and Post-close
cross
Dark pool Establishment
Deutsche
Borse
Nov. 09 Xetra International
Market
MTF Establishment
TMX Group Jul. 11 TMX Select ATS Establishment
Carried Out in Response to Fragmentation or Decreasing Market ShareCarried Out in Response to Fragmentation or Decreasing Market Share
| 16
Aims to achieve ultra-low latency and high levels of reliability and capacityAims to achieve ultra-low latency and high levels of reliability and capacity
NYSE Euronext’s UTP (Universal Trading Platform)
-Connectivity to all the NYSE Euronext markets through low latency global network
-150-400 microseconds per roundtrip and 100,000 orders per second
Nasdaq OMX’s INET trading system
-Used across its US and European markets including equities and derivatives
-1 million messages per second at an average speed of sub-250 microseconds
LSE’s Millennium Exchange
-Abandoned the troubled TradElect system after a full day outage in 2007
-An average latency of less than 120 microseconds, making the LSE one of the fastest venues
ASX’s PureMatch and VolumeMatch
-Adopting the Nasdaq OMX’s INET technology in response to Chi-X Australia’s entrance
-PureMatch is primarily for HFT while VolumeMatch is for bulk order execution service.
Aims to achieve ultra-low latency and high levels of reliability and capacityAims to achieve ultra-low latency and high levels of reliability and capacity
NYSE Euronext’s UTP (Universal Trading Platform)
-Connectivity to all the NYSE Euronext markets through low latency global network
-150-400 microseconds per roundtrip and 100,000 orders per second
Nasdaq OMX’s INET trading system
-Used across its US and European markets including equities and derivatives
-1 million messages per second at an average speed of sub-250 microseconds
LSE’s Millennium Exchange
-Abandoned the troubled TradElect system after a full day outage in 2007
-An average latency of less than 120 microseconds, making the LSE one of the fastest venues
ASX’s PureMatch and VolumeMatch
-Adopting the Nasdaq OMX’s INET technology in response to Chi-X Australia’s entrance
-PureMatch is primarily for HFT while VolumeMatch is for bulk order execution service.
3. Improvement of Trading Systems3. Improvement of Trading Systems
| 17
Selling Exchange Technology and Market ServicesSelling Exchange Technology and Market Services
Incumbent exchanges have tried to diversify revenues by exporting their trading
platforms and IT systems to emerging markets.
-NYSE Technologies, the IT services arm of NYSE Euronext, has provided
trading platforms to emerging markets such as Warsaw and Qatar.
-Nasdaq OMX’s trading platforms have powered many markets including SGX
and ASX.
-The ASEAN Trading Link, a venture between 6 Asian exchanges, was designed
with assistance from NYSE Euronext.
-LSE’s technology will be adopted for upgrades in South Africa and Mongolia.
Selling Exchange Technology and Market ServicesSelling Exchange Technology and Market Services
Incumbent exchanges have tried to diversify revenues by exporting their trading
platforms and IT systems to emerging markets.
-NYSE Technologies, the IT services arm of NYSE Euronext, has provided
trading platforms to emerging markets such as Warsaw and Qatar.
-Nasdaq OMX’s trading platforms have powered many markets including SGX
and ASX.
-The ASEAN Trading Link, a venture between 6 Asian exchanges, was designed
with assistance from NYSE Euronext.
-LSE’s technology will be adopted for upgrades in South Africa and Mongolia.
4. Diversification of Business Models4. Diversification of Business Models
| 18
Table of Contents
I. Overview of Securities Exchanges and Alternative Trading Systems
II. How Conventional Exchanges Are Responding to the Rise of ATSs
III. How ATSs Are Responding to the Evolving Exchange Sector
IV. Growing Competition Between Exchanges and ATSs
V. How Korea’s Exchange Sector Can Stay Competitive
Transformation Into an Exchange
Acquisitions
Provision of New Services
Entry Into Asian markets
How ATSs Are RespondingHow ATSs Are Responding
| 20
Develop new revenue streams through the provision of various services
such as listing
- In Aug. 2008, BATS transformed itself into an exchange and
became the third largest in Jan. 2009 in terms of turnover value.
Moreover, it has advanced into listing new indexes like BATS 1000.
- In March 2010, Direct Edge received approval to convert into two
separate exchanges: EDGA and EDGX
- Alpha Trading Systems, the largest ATS in Canada, received
approval to transform from an ATS to Alpha Exchange.
Develop new revenue streams through the provision of various services
such as listing
- In Aug. 2008, BATS transformed itself into an exchange and
became the third largest in Jan. 2009 in terms of turnover value.
Moreover, it has advanced into listing new indexes like BATS 1000.
- In March 2010, Direct Edge received approval to convert into two
separate exchanges: EDGA and EDGX
- Alpha Trading Systems, the largest ATS in Canada, received
approval to transform from an ATS to Alpha Exchange.
1. Transformation Into an Exchange1. Transformation Into an Exchange
| 21
Due to the increasing number of ATS firms, competition has
intensified, resulting in liquidation or acquisition by other exchanges
and ATS
- In July 2010, NASDAQ OMX Europe, the MTF of NASDAQ OMX,
ceased operations.
- In Feb. 2010, Turquoise, the well-known European MTF, was
acquired by LSE.
- In Nov. 2011, BATS Global completed acquisition of Chi-X
Europe, the largest pan European trading venue.
Due to the increasing number of ATS firms, competition has
intensified, resulting in liquidation or acquisition by other exchanges
and ATS
- In July 2010, NASDAQ OMX Europe, the MTF of NASDAQ OMX,
ceased operations.
- In Feb. 2010, Turquoise, the well-known European MTF, was
acquired by LSE.
- In Nov. 2011, BATS Global completed acquisition of Chi-X
Europe, the largest pan European trading venue.
2. Acquisitions2. Acquisitions
| 22
Operate multiple trading systems with different fee structures and
pricing models
- Direct Edge: EDGX is charging for removing liquidity
EDGA does not charge to provide or take liquidity
- BATS: BZX applies a “taker-maker” model, but BYX applies
a “maker-taker” model
Offer smart order routing
Provide clients a choice among multiple CCP’s
Operate multiple trading systems with different fee structures and
pricing models
- Direct Edge: EDGX is charging for removing liquidity
EDGA does not charge to provide or take liquidity
- BATS: BZX applies a “taker-maker” model, but BYX applies
a “maker-taker” model
Offer smart order routing
Provide clients a choice among multiple CCP’s
3. Provision of New Services3. Provision of New Services
| 23
In Jul. 2010, Chi-X Japan launched PTS to trade Japanese-listed
securities. Chi-X Japan is owned by Chi-X Global, a wholly-owned
subsidiary of the Nomura Group.
In Oct. 2011, the monopolistic position of ASX was broken by the
launch of Chi-X Australia, a subsidiary of Chi-X Global.
From Nov. 2008, a variety of darkpools such as Liquidnet, CLSA’s
Bolcsec, and Goldman Sachs’ Sigma-X have been launched in Hong
Kong.
Chi-East, the joint venture between Chi-X Global and SGX,
commenced operations in Nov 2010 for the trading of selected
securities listed in Singapore, Hong Kong, Australia, and Japan.
In Jul. 2010, Chi-X Japan launched PTS to trade Japanese-listed
securities. Chi-X Japan is owned by Chi-X Global, a wholly-owned
subsidiary of the Nomura Group.
In Oct. 2011, the monopolistic position of ASX was broken by the
launch of Chi-X Australia, a subsidiary of Chi-X Global.
From Nov. 2008, a variety of darkpools such as Liquidnet, CLSA’s
Bolcsec, and Goldman Sachs’ Sigma-X have been launched in Hong
Kong.
Chi-East, the joint venture between Chi-X Global and SGX,
commenced operations in Nov 2010 for the trading of selected
securities listed in Singapore, Hong Kong, Australia, and Japan.
4. Entry Into Asian Markets4. Entry Into Asian Markets
| 24
Table of Contents
I. Overview of Securities Exchanges and Alternative Trading Systems
II. How Conventional Exchanges Are Responding to the Rise of ATSs
III. How ATSs Are Responding to the Evolving Exchange Sector
IV. Growing Competition Between Exchanges and ATSs
V. How Korea’s Exchange Sector Can Stay Competitive
0
5000
10000
15000
20000
25000
NYSE Euronext
Nasdaq OMX
BATS Global Markets
Shanghai Tokyo Shenzhen LSE Direct Edge
Hong Kong
Korea
(USD bn)
Source: “Trading blocs”, PWC, Aug. 2011
There is a large difference in market share between the largest exchange groups and the others, and the growth of ATS’s has been conspicuous.
When they announced their merger in Feb 2011, the combined market share of Chi-X and Bats Europe in European share trading exceeded 20%.
By end of 2010, BATS Global and Direct Edge had captured 21% of US equity market trading volume, placing them at number 3 and 4, respectively.
Fierce Competition Between Exchanges and ATSs Fierce Competition Between Exchanges and ATSs
Electronic Trading Order Book Value Traded in 2010Electronic Trading Order Book Value Traded in 2010
| 26
Though the Americas has the
largest market cap, Asia-
Pacific’s share has grown
significantly.
While the Americas remains
dominant in total trading, the
Asia-Pacific’s share has more
than doubled.
31%
28%
41%
Americas
EAMEAsia
-Pacific
(2009 in USD)
53%
31%
16%
Americas
EAMEAsia
-Pacific
(2000 in USD)
*EAME(Europe-Africa-Middle East)
10% 24%
66%
Americas
EAMEAsia-Pacific
(2000 in USD)
Source: WFE
23%
61%
16%
Americas
EAME
Asia-Pacific
(2009 in USD)
10 Years in Review (2000~2009)10 Years in Review (2000~2009)
Market Capitalization ⇒ +33%Market Capitalization ⇒ +33%
Total Value of Sharing Trading ⇒ +61%Total Value of Sharing Trading ⇒ +61%
| 27
MonopolyMonopolyof conventional exchange
FragmentationFragmentationby ATS & MTF
ConsolidationConsolidationthrough M&A among
exchanges and/or ATS
…..
Repeating Cycle of Centralization and FragmentationRepeating Cycle of Centralization and Fragmentation
Cyclical Trends in the Exchange SectorCyclical Trends in the Exchange Sector
Interestingly, consolidation and liquidity aggregation are not good for HFTs, as they benefit from highly fragmented markets that provide more arbitrage opportunities.
Interestingly, consolidation and liquidity aggregation are not good for HFTs, as they benefit from highly fragmented markets that provide more arbitrage opportunities.
Ironically, regulators’ intention to break up the monopolies of exchanges has created larger global ones.
Ironically, regulators’ intention to break up the monopolies of exchanges has created larger global ones.
| 28
Largest Exchanges by Value of Share
Trading in the Electronic Order Book in 2011
Largest Exchanges by Value of Share
Trading in the Electronic Order Book in 2011
Largest Exchanges by Total Value of
Bonds Traded in 2011
Largest Exchanges by Total Value of
Bonds Traded in 2011
Exchange USD bn % Ch. (YoY)
1 NYSE Euronext US 18,027 1.3
2 NASDAQ OMX US 12,724 0.5
3 Tokyo Stock Exchange Group 3,972 4.9
4 Shanghai Stock Exchange 3,658 -18.6
5 Shenzhen Stock Exchange 2,838 -20.6
6 London Stock Exchange Group 2,837 3.5
7 NYSE Euronext Europe 2,134 5.8
8 Korea Exchange 2,039 26.2
9 Deutsche Börse 1,758 8.0
10 TMX Group 1,542 12.7
Exchange USD bn % Ch. (YoY)
1 BME Spanish Exchanges 17,412 57.7
2 London Stock Exchange Group 5,394 33.9
3 Johannesberg Stock Exchange 2,898 24.9
4 NASDAQ OMX Nordic Exchange 2,674 1.8
5 Colombia Stock Exchange 915 -19.6
6 Korea Exchange 747 47.7
7 Oslo Bors 590 6.6
8 Istanbul Stock Exchange 518 16.2
9 MiCEX 301 29.3
10 Tel Aviv Stock Exchange 246 21.2
Source: WFE
KRX’s Position in Cash Markets KRX’s Position in Cash Markets
| 29
Exchangecontracted
traded% Ch. (YoY)
1 Korea Exchange 3,672 4.1
2 National Stock Exchange India 871 64.4
3 Eurex 468 36.6
4 CBOE 320 18.7
5 TAIFEX 2,838 -20.6
Stock Index Options (2011)Stock Index Options (2011)
Total Equity Derivates (2011)Total Equity Derivates (2011)
Exchangecontracted
traded% Ch. (YoY)
1 Korea Exchange 3,819 4.4
2 Eurex 1,404 18.5
3 National Stock Exchange India 1,221 37.1
4 CBOE 1,205 7.7
5 NASDAQ OMX US 1,177 19.0
(millions of contracts,%)
(millions of contracts,%)
Exchangecontracted
traded% Ch. (YoY)
1 Hong Kong Exchanges 576 7.8
2 Korea Exchange 289 -18.4
3 Deutsche Börse 96 20.0
4 SIX Swiss Exchange 59 55.3
5 NYSE Euronext Europe 43 22.8
Securitized Derivatives (2011)Securitized Derivatives (2011)
(value of trading)
Source: WFE
KRX’s Position in Derivatives MarketsKRX’s Position in Derivatives Markets
| 30
Table of Contents
I. Overview of Securities Exchanges and Alternative Trading Systems
II. How Conventional Exchanges Are Responding to the Rise of ATSs
III. How ATSs Are Responding to the Evolving Exchange Sector
IV. Growing Competition Between Exchanges and ATSs
V. How Korea’s Exchange Sector Can Stay Competitive
Strategic
Alliance
Extend global networksExtend global networks
Reduce technology gapReduce technology gap
HFTHFT
Strengthening of InfrastructureStrengthening of Infrastructure
Collaborate in trading systems developmentCollaborate in trading systems development
Fair competition Mutual Support
US · Europe
Asia-Pacific“Slow and
Steady”
Consolidation
Exchange
ATS
Rational Regulatory Reforms
A Proposed Future for Korea’s Exchange SectorA Proposed Future for Korea’s Exchange Sector
| 32
Enhance mutual accessibility to markets
Enhance mutual accessibility to markets
Recommendations for Korea’s Exchange Sector
Invest in and Jointly Develop IT System
Pave the Way for the Successful Introduction of ATSs
Devise New Products Within the Asia-Pacific
Offer a Variety of Services to Participants
Improve Derivatives Trading Platforms and Clearing & Settlement
Strengthen Strategic Alliances with the US and Europe
Encourage Consolidation Within the Asia-Pacific
Continue to invest substantial sums in IT systems
- Work constantly to fulfill the demand for faster and more sophisticated trading
technology
- Enhance and reinforce the stability of the system to prevent market accidents
such as the “flash crash” of May 2010
- Improve capacity and technology to attract large volumes of algorithmic traders,
especially HFTs
Work with Asian partners to jointly develop trading platforms
- Seek new revenue streams, for example, by exporting IT systems or providing
assistance in the opening of securities exchanges in Asian emerging markets
- The future consolidation of Asian exchanges will be easier and more efficient if
common trading platforms are used.
Continue to invest substantial sums in IT systems
- Work constantly to fulfill the demand for faster and more sophisticated trading
technology
- Enhance and reinforce the stability of the system to prevent market accidents
such as the “flash crash” of May 2010
- Improve capacity and technology to attract large volumes of algorithmic traders,
especially HFTs
Work with Asian partners to jointly develop trading platforms
- Seek new revenue streams, for example, by exporting IT systems or providing
assistance in the opening of securities exchanges in Asian emerging markets
- The future consolidation of Asian exchanges will be easier and more efficient if
common trading platforms are used.
1. Invest in and Jointly Develop IT Systems1. Invest in and Jointly Develop IT Systems
| 34
Ensure that ATSs are launched successfully to build up internal
competitiveness
- There is a need to prepare ATSs for successful launching before the
amendment to the “Financial Investment Services and Capital Market Act” is
ratified.
- It is advisable to establish holding companies owned by Asian financial
institutions that can own and operate ATSs in the Asia-Pacific.
* Large Asian investment banks and brokerage firms may be good candidates.
Learn how to manage ATSs through alliances
- Strengthen ties with larger exchanges, especially ones having significant
experience operating an ATS
Ensure that ATSs are launched successfully to build up internal
competitiveness
- There is a need to prepare ATSs for successful launching before the
amendment to the “Financial Investment Services and Capital Market Act” is
ratified.
- It is advisable to establish holding companies owned by Asian financial
institutions that can own and operate ATSs in the Asia-Pacific.
* Large Asian investment banks and brokerage firms may be good candidates.
Learn how to manage ATSs through alliances
- Strengthen ties with larger exchanges, especially ones having significant
experience operating an ATS
2. Pave the Way for the Successful Introduction of ATS2. Pave the Way for the Successful Introduction of ATS
| 35
Encourage Asia-Pacific countries to cross-list securities and trade a range of
products
- As a first step, the representative stocks of each country should be considered
for dual-listing and/or cross-trading.
* KRX has proposed dual-listings with China and Honk Kong, and has entered a
cross-trading agreement with Japan that covers all stocks and is set to
commence in November 2012.
- Create a combined ETF that incorporates similar sectors from each exchange,
as the listing criteria are easier to meet in spite of differing regulations and
cultures
- Take advantage of the rapid growth of derivatives in the region to devise new
derivative products that can attract the attention of multiple countries
Encourage Asia-Pacific countries to cross-list securities and trade a range of
products
- As a first step, the representative stocks of each country should be considered
for dual-listing and/or cross-trading.
* KRX has proposed dual-listings with China and Honk Kong, and has entered a
cross-trading agreement with Japan that covers all stocks and is set to
commence in November 2012.
- Create a combined ETF that incorporates similar sectors from each exchange,
as the listing criteria are easier to meet in spite of differing regulations and
cultures
- Take advantage of the rapid growth of derivatives in the region to devise new
derivative products that can attract the attention of multiple countries
3. Devise New Products Within the Asia-Pacific3. Devise New Products Within the Asia-Pacific
| 36
Accept various types of orders from large participants
- Diversify the types of orders accepted, especially for large-volume traders such
as algorithmic traders
- A good example might be iceberg orders, which help to mitigate market impact.
Offer services aimed at enhancing the speed of order execution
- The popularity of low latency trading has been giving a good chance for growth
of exchanges offering co-location services.
- DMA (Direct Market Access) might be a service offered that enables
sophisticated investors to place orders directly on the exchange order book for
high speed execution.
Accept various types of orders from large participants
- Diversify the types of orders accepted, especially for large-volume traders such
as algorithmic traders
- A good example might be iceberg orders, which help to mitigate market impact.
Offer services aimed at enhancing the speed of order execution
- The popularity of low latency trading has been giving a good chance for growth
of exchanges offering co-location services.
- DMA (Direct Market Access) might be a service offered that enables
sophisticated investors to place orders directly on the exchange order book for
high speed execution.
4. Offer a Variety of Services to Participants 4. Offer a Variety of Services to Participants
| 37
Prepare for standardization and centralization of OTC derivatives and their trading platforms
- In accordance with the US Dodd-Frank Act and MiFID, many derivative products will be traded through exchanges and cleared through clearing houses.
- This will provide a great opportunity for exchange groups that focus primarily on equities.
- Also, attention should be paid to OTFs (Organised Trading Facilities) and SEFs (Swap Executive Facilities), the mirror images of MTF and ATS in cash market, respectively, as potential rivals to exchanges.
Enhance systems for clearing and settlement, as these might provide an important
competitive edge in the near future
- In Sep. 2010, the EC published the European Market Infrastructure Regulation (EMIR),
which aims to increase stability in OTC derivative markets.
* It aims to ensure that OTC contracts are centrally cleared and trading parties able to select
among a variety of clearing houses.
- If clearing platforms are more open, it may be easier for specialist clearers to carve out a
competitive position.
Prepare for standardization and centralization of OTC derivatives and their trading platforms
- In accordance with the US Dodd-Frank Act and MiFID, many derivative products will be traded through exchanges and cleared through clearing houses.
- This will provide a great opportunity for exchange groups that focus primarily on equities.
- Also, attention should be paid to OTFs (Organised Trading Facilities) and SEFs (Swap Executive Facilities), the mirror images of MTF and ATS in cash market, respectively, as potential rivals to exchanges.
Enhance systems for clearing and settlement, as these might provide an important
competitive edge in the near future
- In Sep. 2010, the EC published the European Market Infrastructure Regulation (EMIR),
which aims to increase stability in OTC derivative markets.
* It aims to ensure that OTC contracts are centrally cleared and trading parties able to select
among a variety of clearing houses.
- If clearing platforms are more open, it may be easier for specialist clearers to carve out a
competitive position.
5. Improve Derivatives Trading Platforms and Clearing & Settlement 5. Improve Derivatives Trading Platforms and Clearing & Settlement
| 38
Extend global networks through strategic alliances with US and Europe trading
venues
- Construct 24-hour trading systems through network linkages
* At present, KRX, CME(US), and Eurex (Europe) are offering 24-hour trading of
KOSPI 200 futures
- Strengthen strategic alliances through cross-listings and cross-trading
Actively embrace advanced systems and trading technologies
-To shorten the time required to develop systems and technology, it is advisable to
learn from the experiences of the advanced systems.
Extend global networks through strategic alliances with US and Europe trading
venues
- Construct 24-hour trading systems through network linkages
* At present, KRX, CME(US), and Eurex (Europe) are offering 24-hour trading of
KOSPI 200 futures
- Strengthen strategic alliances through cross-listings and cross-trading
Actively embrace advanced systems and trading technologies
-To shorten the time required to develop systems and technology, it is advisable to
learn from the experiences of the advanced systems.
6. Strengthen Strategic Alliances with the US and Europe6. Strengthen Strategic Alliances with the US and Europe
| 39
Push ahead toward gradual consolidation of trading venues in Asia-Pacific
- The countries of the Asia-Pacific differ widely not only in terms of language and
cultures, but also in terms of their capital markets and regulatory environments.
- Nevertheless, the trend toward integration seems to be established and may
even accelerate in the near future.
* ASEAN is promoting cross-border collaboration through its upcoming “ASEAN
Trading Link,” which is made-up of seven stock exchanges from Indonesia,
Malaysia, the Philippines, Singapore, Thailand and Vietnam (2). The 210 stocks
representing the 30 blue chips from each exchange will be available for trading
on a common platform.
* The BRICS and Hong Kong will start to cross list their derivatives indices from
Mar. 2012 in a bid to expand their product offerings.
Push ahead toward gradual consolidation of trading venues in Asia-Pacific
- The countries of the Asia-Pacific differ widely not only in terms of language and
cultures, but also in terms of their capital markets and regulatory environments.
- Nevertheless, the trend toward integration seems to be established and may
even accelerate in the near future.
* ASEAN is promoting cross-border collaboration through its upcoming “ASEAN
Trading Link,” which is made-up of seven stock exchanges from Indonesia,
Malaysia, the Philippines, Singapore, Thailand and Vietnam (2). The 210 stocks
representing the 30 blue chips from each exchange will be available for trading
on a common platform.
* The BRICS and Hong Kong will start to cross list their derivatives indices from
Mar. 2012 in a bid to expand their product offerings.
7. Encourage Consolidation Within the Asia-Pacific7. Encourage Consolidation Within the Asia-Pacific
| 40