Korea Capital Market Institute

Globally, the exchange industry has played a pivotal role in the capital market. The reorganization of KRX has drawn keen attention because the change could impose a direct impact in the competitiveness of Korea’s capital markets.

In this report, we looked at major global stock exchanges to carry out a chronological analysis to identify what are the changes triggered by those drivers. Also examined were the changes in the characteristics of the exchange market in the post-global financial crisis era.

For analysis, this report divided the history of the exchange industry into three phases: initial formation, transition to competition, and post-crisis. 

During the first phase of initial formation, the primary focus was of course to establish a stock exchange, a market place where brokers and traders can abide by their own rules to execute transactions stably and without any intervention.

In the European continent, the first stock exchange was established in Paris, but the European financial center moved to London as extreme confusion and disorder ensued in the aftermath of the French Revolution. In the US, Philadelphia used to be the center of finance at the beginning. It was not until 1792 that the Buttonwood Agreement led to stock market development in New York. In the mid 19th century, New York came to surpass Philadelphia thanks to the merge of two major stock exchanges into the New York Stock Exchange, and also by technological innovation.  

With the growing clout of institutional investors in the stock market and differentiated interests among exchange members, it became increasing difficult for exchanges to maintain their fixed commission scheme. In 1975, the fixed commission scheme eventually came to an end, which affected other Western countries including the UK.

During the second phase of transition to a competition structure, issues such as the penetration of computers, demutualization, IPO, and M&A came to the fore. It is worth noting that screen trading began to take hold first in newly-established or local stock exchanges that are less likely to face opposition among members, ahead of traditional, more established exchanges.

The third post-crisis phase refers to the era after the global financial crisis, during which the global exchange industry has sought after new growth drivers in the face of stagnant sales and slow growth. Today, major exchanges are pushing for enlargement, globalization, vertical integration, and consolidation of securities and derivatives amidst the ever-intensifying competition with ATS. 

Taking lessons from the potent drivers that triggered changes in each phase, KRX should undertake a reform so as to better meet the differentiated needs of capital market participants, and raise the competitiveness of the overall capital markets.