The alternative exchange NextTrade has successfully established itself with a stock transaction market share nearing 30% just two months after its launch. As the multiple exchange system lands smoothly, the Korea Exchange is focusing on the market surveillance system that needs to be built in a new environment.
The Market Surveillance Committee of the Korea Exchange is currently studying overseas cases of unfair transaction practices that could arise in a multiple exchange system. The committee aims to proactively examine cases of unfair transaction practices that occurred in countries where multiple exchange systems were introduced, such as the United States and Europe, to reference when establishing related systems or regulations in the future. This task is managed by the Institutional Department of the Market Surveillance Committee.
The committee noted, "The likelihood of such unfair transaction practices occurring immediately is still considered low, and we should recognize various possibilities that could arise after the multiple exchange system is established and review relevant regulations and policies."
NextTrade, which obtained a full license for multi-party trading agency in February from the Financial Services Commission, started services on March 4. As a result, the securities transaction market that had been monopolized by the Korea Exchange has shifted to a competitive system, and significant effects have emerged, such as extended securities trading hours and diversified investment strategies due to the introduction of new order types (mid-price, stop-limit orders).
However, the multiple exchange system is not entirely positive in every aspect. In the United States and Europe, numerous cases of unfair transaction practices were detected, exploiting disparities arising from different liquidity structures and price-setting methods among exchanges.
For example, in the United States, there were unfair transaction practices where an exchange placed large orders in another futures market only to repeatedly withdraw them, causing abrupt price fluctuations and realizing arbitrage when the spot prices on other exchanges moved according to manipulations in futures pricing.
There is also a flaw that makes it difficult to identify unfair transactions early when multiple exchanges are in operation. Even though NextTrade is called an alternative exchange, it is not strictly considered an exchange yet. It only has basic brokerage functions without functions for initial public offerings or market surveillance. The Korea Exchange supports the related system and personnel for market surveillance.
For this reason, discussions should also take place on whether alternative exchanges need to acquire surveillance functions like the Korea Exchange or whether a unified system should be established in the long term.
In this regard, Han Ah-reum, a senior researcher at the Capital Market Research Institute, said, "In the short term, it is necessary to maintain policy flexibility for the activation of alternative exchanges, but in the long term, efforts are needed to establish a fair competition system suitable for expanded alternative exchanges similar to those in the United States and Europe, as well as a unified market disclosure system including trading information between the Korea Exchange and NextTrade."
The United States, which introduced a multiple exchange system early on, implemented the National Market System (Reg NMS) in 2005, while the European Union established a unified market surveillance system through the Markets in Financial Instruments Directive II (MiFID II) and linked the abnormal transaction detection system, as well as built a unified market disclosure system.