Enhancing the Competitiveness of Korea’s Securities Exchanges

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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.

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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

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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)

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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)


Multilateral Trading Facilities (MTF)


Multilateral Trading Facilities (MTF)


Regulatory Reforms Level the Playing Field Regulatory Reforms Level the Playing Field

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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

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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)

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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

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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⇒ %

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Table of Contents






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

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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)

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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)

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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

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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

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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

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Table of Contents






Transformation Into an Exchange

Acquisitions

Provision of New Services

Entry Into Asian markets

How ATSs Are RespondingHow ATSs Are Responding

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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

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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

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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

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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

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Table of Contents






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

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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%

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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.

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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

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Exchangecontracted

traded% Ch. (YoY)


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)


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

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Table of Contents






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

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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

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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

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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

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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

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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

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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

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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

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Documents

Enhancing the Competitiveness of Korea’s Securities Exchanges