Authorities Introduce ATS Operation Plan to Promote Improvement in Capital Market InfrastructureMay 09, 2024

The Financial Services Commission announced that Korea’s first alternative trading system (ATS), Nextrade, will begin to operate in domestic market starting in the first half of next year. This will mark the operation of a multiple and competition-based stock trading system in Korea’s capital market as in the case with those found in major overseas economies. Introducing an ATS has been a key part of the government’s capital market reform initiative, and it is intended to make domestic capital market more accessible for investors with enhanced convenience for transactions. With the operation of an ATS, stock trading hours will be extended to twelve hours a day from 08:00 am to 08:00 pm. Also, as more order types will become available for investors with enhanced competition to help lower fees, transaction costs will be reduced and trading convenience improved for investors.

Seminar on ATS Operation Plan

The FSC held a seminar on the measures for operating ATS with the Korea Financial Investment Association, Korea Exchange (KRX), and Nextrade on May 9. As the preliminary approval for operating an ATS was granted to Nextrade in July 2023, the FSC and related organizations have since worked on the measures for ATS operation and plans for ensuring effective market oversight in a comprehensive and integrated manner. At today’s seminar, the authorities unveiled the measures and held discussions with market participants. FSC Vice Chairman Kim Soyoung delivered congratulatory remarks at the beginning of the seminar and emphasized the importance of ensuring stability and fairness in market management. Vice Chairman Kim also asked participants to thoroughly prepare for the official launch of an ATS and to ensure that investors are kept posted with relevant information. In addition, Vice Chairman Kim said that the financial authorities will work to prepare guidelines and revise relevant rules and regulations necessary for the operation of an ATS.

A New Stock Trading Experience

With the introduction of an ATS, stock market investors will be able to enjoy much enhanced stock trading experience. Aside from regular trading hours, which will be identically operated by both KRX and Nextrade, the ATS will operate pre-market (from 08:00 to 08:50) and after-market (from 15:30 to 20:00) sessions. As a result, compared with the current system, daily trading hours will be extended by five hours and thirty minutes to a total of twelve hours a day.

Meanwhile, there will be changes regarding the duration in which the KRX displays potential execution prices at opening and the time for closing auctions. The changes are intended to prevent price manipulation, while continuing to maintain the significance of what opening and closing prices represent. The KRX’s opening auction hours will remain the same as now between 08:30 and 09:00, but the duration in which it displays potential execution prices at opening will be reduced to ten minutes (between 08:50 and 09:00). During this time, Nextrade will temporarily suspend transactions. Moreover, the KRX’s closing auction hours will be reduced to five minutes (between 15:25 and 15:30). During this time, transactions at Nextrade will be suspended temporarily.

In addition, there will be more types of orders (mid-point order and stop-limit ordere) made available for investors apart from market orders and four types of limit orders currently available in domestic stock market. Mid-point orders, which automatically adjust the price to the mid-range of the best bid-ask orders, and stop-limit orders, which instruct brokers to place limit orders when the investor-specified stop trigger price is attained, will be newly made available to investors. Their addition will offer investors with wider options in terms of their investment strategies, since it will allow them to choose newly available order types pegged to market prices. The newly introduced order types will also be made available by the KRX in time for Nextrade’s launch.

With regard to the level of transaction fees, Nextrade will offer 20 percent to 40 percent lower fee levels for orders executed in comparison to KRX’s fee levels, which will boost competition and help to lower transaction costs for investor convenience.

Integrated Market Oversight

Nextrade’s launch will require more comprehensive and integrated ways to manage and supervise market to ensure protection for investors and cope with dispersion of market liquidity between the two securities exchange operators, KRX and Nextrade.

First, securities companies will be required to observe the best execution rule obligating them to prepare standards for exercising reasonable diligence in executing transactions at the most favorable terms available for investors. Since there has been a single exchange operator in Korea, even though the best execution rule has been in place under the legal framework of the Financial Investment Services and Capital Markets Act (FSCMA), this rule has not been applicable in practice thus far. As such, the Financial Supervisory Service (FSS) will introduce guidelines on best execution in the first half of this year, and securities firms will prepare their own best execution standards and smart order routing (SOR) systems based on the guidelines for automatically executing orders for investors.

In accordance with the best execution standards set up by securities firms, orders from investors will be executed in the following way. First, investors can directly choose a market in which their orders are executed. If an investor has not selected a preferred market, taker orders will be placed in a market most favorable to the investor considering total costs for both buy and sell orders, taking into account all relevant factors including price, volume, and transaction costs. On the other hand, maker orders, which are not executed immediately but remain in the list of orders to be executed in the future, will be placed in a market where such orders have a higher chance of being executed after having a comprehensive evaluation of bid-ask balance and spread by each securities firm.

Second, management and supervision over short selling will be maintained at a consistent and rigorous manner for Nextrade. Short selling will be restricted in pre-market and after-market sessions, so placing short sale orders at Nextrade will only be allowed during regular trading sessions (between 09:00 and 15:25). Relevant rules on displaying short sale orders and the designation of overheated short sale items will be identically applied to Nextrade, while the uptick rule, which is designed to prevent price declines inflicted directly by short selling, will be operated based on the last executed price in each market.

Lastly, Nextrade will be subject to the same price limit, market stabilization mechanisms, market surveillance, and clearing and settlement process currently applied to the KRX. Nextrade’s price limit will be ±30 percent of KRX closing price , and the price limit for after-market sessions will also be ±30 percent of KRX closing price. Nextrade will also be subject to KRX’s trading suspension, circuit breaker, and sidecar mechanisms, and its market surveillance and clearing functions will be carried out by the KRX. Transactions at Nextrade, including in pre-market and after-market sessions, will be cleared and settled two business days after the trade (T+2).

Additional Steps for Upgrading Capital Market Regulations

In line with the aim of introducing an ATS, the authorities plan to take additional steps to upgrade relevant rules and regulations. First, the FSC will revise regulations to allow the transaction of domestically listed exchange-traded funds (ETFs) and exchange-traded notes (ETNs) through an ATS. Nextrade plans to seek an approval from the authorities to enable this in the future.

Moreover, in order to facilitate institutional investors’ transactions through Nextrade, mandatory bid rule will not be applied to institutional investors for their stock holding of five percent or more via acquisition through an ATS, which will be the same with institutional investors’ transactions via KRX. However, since this requires a revision of the FSCMA, the FSC will work to provide active support for parliamentary review to facilitate prompt passage of a revision bill. In the case of a delay in the revision process, authorities will make sure to prevent rule breaking by making available relevant information to investors through securities firms.

Further Plan

The FSC plans to revise relevant rules and regulations within the second half of this year to ensure seamless operation of an ATS. In the meantime, Nextrade will apply to get final approval from the FSC at the end of this year with a goal to begin operating ATS in the first half of 2025.

* Please refer to the attached PDF for details.