By Maria Trombly | Securities Industry News | June 13, 2005

The job of consolidating South Korea's three stock exchanges into one was formally completed in January when the tech-heavy Kosdaq merged with the nation's equities and futures exchanges into the Korea Exchange (KRX), based in Busan. The task now is to continue to streamline operations and regulations to attract foreign capital and build global relationships, exchange officials and member firms say.

In the latest step along that path, the KRX announced that it would harmonize rules governing its Kosdaq and stock exchange divisions, "to prevent confusion amongst investors arising as a result of the differences between the rules of the two markets and to reduce IT costs for securities companies." However, "The specific provisions of the rules governing the unique aspects of the individual markets will remain intact," the exchange said in a June 6 statement.

Speaking at a global investors conference sponsored by the exchange last month, KRX president Young-Tak Lee said that profiting from the globalization of capital markets is a major goal of the merger. "The increasing foreign presence in the Korean securities market has greatly contributed to the quantitative and qualitative growth of our market," he said. Today, foreign share ownership accounts for over 42 percent of market capitalization in Korea.

"This is not a small figure," Lee told the investors. "But we anticipate more foreign investment from the broader spectrum of the international investment community. To this end, we will do our utmost to better serve foreign investors and make our exchange a truly global market, where domestic and foreign investors and individual and institutional investors participate on a level playing field."

Today, there are no foreign companies listed on the Korea Exchange, but Lee promised that the exchange will work to attract them. In particular, several Chinese companies are interested in listing on KRX, Lee recently told NewsWorld, a Korean business monthly.

Lee said that global standards and better corporate governance may help the Korean market recover from the doldrums in which it finds itself. Today, Korean firms trade at a lower than expected price/earnings ratio of 14x, said Lee--a figure known as the "Korean discount."

"The discount is due to lack of transparency," said one Korean broker, who did not want his name to be used. "As foreign companies come in, if they bring their culture in our market, hopefully that will bring a better quality of accounting and management."

But there are other benefits of the consolidation, as well. "The purpose of the consolidation was to reduce trading costs," said Sok-hun Kang, director of the Korea Securities Dealers Association. As three different trading platforms are consolidated onto one, brokerages will spend less on technology, Kang says. In addition, the exchanges themselves will be able to reduce their total costs. "These kinds of processes will reduce the trading fees in the long run," he said.
The consolidated exchange's plans include going public, forming relationships with exchanges in other countries and seeking listings of foreign firms.

A sales manager at Good Morning Shinhan Securities, said that his brokerage hasn't yet felt the benefits of the merger, but agrees that the Korean industry will benefit in the long run. For example, prior to the merger, regulations prevented his firm from trading individual futures and commodities. His firm was only allowed to trade the Kospi 200 index of futures and options.

"After the merger, we can also trade products like commodities and futures," the sales manager said. "We will have more capability to deal with our clients, providing one-stop shopping for them." He expects that commodities and futures brokers may suffer slightly, however, as customers go to bigger firms, such as Good Morning Shinhan.

While the merger may also lead to lower prices, the manager said, "We haven't seen that yet--but maybe it's just too early." Having three separate markets, each with its own clearing, settlement, regulatory and IT systems, was very inefficient, Lee noted. "There was an urgent need for reducing transaction costs and building up a user-oriented system," he said.

The exchange has other ambitious steps planned, including going public, forming relationships with exchanges in other countries and seeking listings of foreign firms. KRX's Lee said the exchange will push for an initial public offering "at the earliest possible date." "This will definitely reshape the market," said the Good Morning Shinhan manager, explaining that he hopes to see more transparency in the market as a result, and more opportunities for investors.

For example, the exchange is in the midst of negotiating a bilateral trading agreement with the Singapore Exchange. "The investors will have more opportunities," he said. "They can do arbitrage with the Singapore market. They will have more opportunities to trade and to expand their horizons."

Meanwhile, the government has taken additional steps to bolster the domestic stock market, said Sean Chang, an analyst at Samsung Securities. For example, Kosdaq companies once had weaker governance requirements than companies listed on the main board. "They made the audits much more strict," Chang said. "Before, the financial statements were not credible."

Today, Chang reports, listing requirements are virtually identical.