Market Advancement Possible with
Launch of KRX?

By Park Sang-yong, President of Korea Stock Research Institute
The Korea Exchange (KRX), a consolidation of equities, futures and Kosdaq stock, was launched on Jan. 27. It was regrettable that wrangling ensued over a merge among the Korea Stock Exchange, the Korea Futures Exchange, and the Kosdaq Stock Market, but I now congratulate the successful launch of KRX and wish for evolving it into the one corresponding to Korea's goal of becoming a financial hub of Northeast Asia.
The capital market is a flower of capitalism. The exchange plays a pivotal role in the capital market. Taking a look into the stature of the capital market in the national economy and the background of the merger of the three exchanges, I would like to suggest a few tasks the newly launched KRX will have to implement.
A research on the correlation between industrial growth and financial structure among OECD countries, conducted by Korea Stock Research Institute (KSRI), indicates that countries with a bank-oriented financial structure, tend to make a fast economic growth in conventional industries, whereas states with the one centering around the financial market witness innovative industries growing at a fast pace.
Korea is one of the representative nations that have a bank-oriented financial structure, and at the same time strives to pursue an industrial structure centering around innovative industries, including next-generation new growth industrial engines. It may lack harmony between financial and industrial structure.
The nation has to build up a financial structure with a higher portion of the financial market so as to expedite development of innovative industries, essential for national economic development. To this end, households' percentage of stock holdings to financial assets and the ratio of the aggregate value of listed shares out of gross domestic product (GDP) should be raised to the levels of advanced countries with a capital market-oriented structure. The role, status and efficiency of the exchange, a key institution for the operation of the market, should be raised.
There are two environmental changes. The first factor is that each exchange, which had enjoyed a traditional monopoly in its own country, is put to a fierce competition between regions due to the integration of EU and globalization. The other is that a surge in the scale of fixed cost for the operation of transaction systems, caused by advancement of the IT industry, has made the economy of scale more important than ever. In short, it means that improving efficiency through the economy of scale riding on integration becomes a trend of each country's bid to change its market operations in order to cope with a new international competition.
Accordingly, the merged KRX has been launched as a monopoly business concern domestically, but it needs to raise its capabilities to brace for the potential of international competition. I would like to recommend the following suggestions so that KRX can secure an international competitive edge and meet market users' diverse demands.
First, KRX will have to raise the diversity and quality of listed products. I would like suggest it to proactively pursue for the domestic listing of foreign corporations. Attraction of listed foreign corporations initially does not contribute much to short-term profits, but it brings big gains in terms of improving institutional systems to international standards in a bid to lure foreign companies.
The potential of futures and options markets is enormous, but KRX will have redouble efforts to develop new products, which have been neglected in the course of integration.
Secondly, KRX should strengthen its competitive edge through international connection. If links with foreign markets are reinforced, it will bring about increased convenience for market participants, thus expediting the domestic flow of foreign capital and creating a virtuous cycle of raising the liquidity of the domestic market and furthering foreign capital flow into the nation.
Thirdly, it needs to improve flexibility and transparency in a bid to upgrade market management systems to international standards. An international trend of ensuring efficient market management is to suggest a minimum of basic management principles and employ a transparent and stringent regulatory system rather than depend on the past's enforcing unified restrictions based on a myriad of regulations.
Fourthly, a system should be established to satisfy investors' demands by lowering transaction fees and improving users' convenience. Now that the markets have been merged, KRX should find ways to lower transaction costs while ensuring safety by restructuring an infrastructure for clearing, settlements and computing in an efficient and rational manner.
Lastly, KRX needs to expand concern about institutional investors and the scope of their activities so as to shift Korea's financial structure into a capital market-oriented one. One of the keen issues is about how to solve "Korea Discount," an under-valuation of listed shares that undermines listing incentives.
How does it solve such problems as worse governance hampering investors' investment desire and excessive price fluctuations? How advancement of legal systems essential for development of the capital market and development of such contract-type institution as pensions can be attained?
I expect KRX to play its role corresponding to the new stature as an integrated institution by widening an awareness toward an extension of institutional overhaul for development of the capital market and removing stumbling blocks standing in the way for streamlining. nw