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Korea Exchange Aims to Expand via Stakes in Smaller Players

In a bid to stay competitive, the world’s 15th-largest stock exchange, led by Kyungsoo Choi, is buying into its counterparts in Central Asia and elsewhere.

Business as usual isn’t an option for Kyungsoo Choi, chairman and CEO of the Korea Exchange. Choi, who was appointed by South Korean President Park Geun-hye in 2013, says he’s accelerating a plan to grow KRX into other Asian and frontier markets, with an eye to investing in smaller stock exchanges that may benefit from its technology and experience.

“We are seeking to expand our scope of business to nations in Central Asia and also to Africa,” he tells Institutional Investor. “We are interested in investing, in having equity stakes in those markets,” adds Choi, who was previously president and CEO of Hyundai Securities Co., one of Korea’s top brokerages. “We would like to have 10 percent or 25 percent, and even up to 49 percent, equity stakes in every market we invest in.”

KRX is one of several Asian exchanges jostling to become financial hubs throughout the region and beyond. As Choi points out, it’s ramping up its expansion as exchanges worldwide fight to secure liquidity through mergers and alliances.

Choi believes the Korean securities industry must follow the lead of domestic companies such as Samsung, which has become a global market leader by exporting its technology. Busan-based KRX is building on an existing international platform that includes 49 percent and 45 percent equity stakes in the operating companies of the Lao Securities Exchange and the Cambodia Securities Exchange, respectively. In the past five years, KRX, which is designated as a public enterprise even though the Korean government holds no direct stake, has helped both exchanges develop and upgrade their trading systems.

“Korea Exchange is one of the most modern global exchanges in the world and has some of the highest derivatives volumes globally,” says Anshuman Jaswal, a New York–based senior analyst with financial services research firm Celent. But it has a high concentration of equity index options, and a decline in trading volume for this product has made the market environment tougher, Jaswal explains: “KRX needs to diversify its product portfolio to continue to remain competitive globally.”

KRX was created in 2005 through the merger of the Korea Stock Exchange and several other exchanges. Chief among KRX’s established rivals is New York–based Nasdaq OMX Group, a provider of trading and other technology to some 70 marketplaces in 50 countries. Before NYSE Euronext merged with Atlanta-headquartered Intercontinental Exchange in 2013, its NYSE Technologies division competed favorably with Nasdaq. But ICE hasn’t shown much interest in being a vendor, market observers note, so there may be an opportunity for the likes of KRX.

The 15th-largest securities exchange, KRX had a market capitalization of $1.25 trillion at the end of last year, according to the World Federation of Exchanges, an increase of almost 14 percent from 2011. But it hasn’t kept pace with its Asian competitors, particularly mainland China’s two exchanges, Shanghai and Shenzhen, which have seen volumes triple in the past decade, catapulting them to No. 5 and No. 8, respectively. Including the Hong Kong Stock Exchange (No. 6), China’s equity capital markets had a collective market cap of $10 trillion at the end of 2014, still far behind the combined $26 trillion for the New York Stock Exchange and the Nasdaq Stock Market (Nos. 1 and 2) but well ahead of third-ranked London Stock Exchange Group ($6.2 trillion).

Though KRX is far from being a global leader, it’s an attractive and deep market with a wide range of products, including securities from more than 1,800 listed companies and dozens of derivatives, exchange-traded funds, equity-linked warrants and real estate investment trusts, Celent’s Jaswal says.

Choi, who holds a Ph.D. in economics from Seoul’s Soongsil University and spent his early career with the Korean Ministry of Finance, says KRX has more than money to offer potential partners in frontier markets. One draw is EXTURE+, its in-house trading platform, which has been adopted by the Azerbaijan, Cambodia, Laos, Uzbekistan and Vietnam exchanges. In February the Securities and Exchange Commission of Thailand signed a deal with the Korean exchange to implement a KRX-developed market surveillance system that looks out for risks such as trading errors and computer crashes. “We already are competitive against the best trading systems in the world,” asserts Choi, who notes that KRX plans to broaden its information technology business to Eastern Europe and the Middle East this year.

The KRX head has no illusions about what’s at stake: “We must expand in order to survive,” he says.

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