[Brokerage Settlement - Next Year's Issues] Overseas Stocks and PF Challenge for Small and Mid-sized Firms... ATS as a Variable

'Investment Immigration' Accelerates... Overseas Stock Brokerage War
Expectations for Eased Real Estate PF Concerns, Caution Remains
Full Launch of ATS in March Next Year... Securities Firms Also Compete

As individual investors' preference for overseas stocks is expected to continue next year, attention is focused on whether small and medium-sized securities firms can capture the overseas stock brokerage market share, which is mostly dominated by large securities firms. Although concerns over the real estate project financing (PF) crisis are expected to gradually improve due to reduced funding costs following interest rate cuts, there are worries that differences in resilience between large and small-to-medium firms may emerge. Ahead of the launch of the Alternative Trading System (ATS) scheduled for March next year, securities firms that demonstrate superiority in best execution obligation operations are expected to secure competitiveness.

Individual Investors' Love for U.S. Stocks... "Overseas Stock Brokerage Competition to Intensify"

Next year, the domestic stock market is expected to remain in a box range due to concerns over slowing corporate earnings and domestic and international uncertainties, while individual investors are likely to continue shifting overseas due to improved accessibility to foreign stocks and high expected returns. Accordingly, securities firms plan to offset the decline in domestic trading volume by increasing overseas stock commission fees.

An official from a securities firm said, "As the domestic stock market remains in a box range and fails to synchronize with advanced markets, many individual investors have turned their attention overseas. In response, securities firms are expected to secure brokerage revenue through overseas markets such as the U.S. rather than seeking additional growth in the domestic stock market," adding, "Competition for market share related to overseas stocks, including marketing, is already intensifying."

Large securities firms are actively engaging in marketing related to overseas stocks, accelerating the concentration of overseas stock brokerage market share among top large firms. It is also analyzed that it is not easy for small and medium-sized firms to expand their market share in overseas stocks. Lee Jae-wan, a research fellow at Hana Financial Management Research Institute, said, "Securities firms are expanding various products and services to target the overseas stock brokerage market," and predicted, "The profitability and competitiveness gap between large and small-to-medium firms will deepen."

Gradual Recovery of Real Estate PF... Some Small and Medium Firms Remain Cautious

Attention is focused on whether securities firms, which suffered significant losses in real estate financing due to the sharp interest rate hikes in 2023, can shake off related risks amid the upcoming interest rate cut cycle next year. Experts expect the sense of crisis over real estate PF to ease, but some burden of provisions remains, while funding cost pressure is expected to ease.

Jung Tae-jun, a researcher at Mirae Asset Securities, said, "With the recovery of the real estate PF market, the balance of debt guarantees may increase slightly, but due to regulatory impacts, it will be difficult to see rapid growth as before," adding, "If the base interest rate cut leads to improved financial costs, overall business feasibility is expected to improve, so the possibility of additional provision accumulation is limited."

However, there are observations that differentiation in recovery between large and small-to-medium firms will appear. Kang Seung-geon, a researcher at KB Securities, said, "Real estate financing is expected to show a recovery trend, but it is centered on large securities firms. Considering the regulatory tightening stance of supervisory authorities, the investment capacity gap between large and small-to-medium firms will further widen," he predicted.

Large firms are offsetting concerns over insolvency by proactively entering high-quality projects, but small and medium-sized firms still have a high proportion of bridge loan exposure, so related loss recognition is expected to continue until the first half of next year. Yoon Yoo-dong, a researcher at NH Investment & Securities, said, "The gap in business capabilities with large firms is widening every year. Except for cases mentioned as merger and acquisition targets, it will not be easy to attract attention based solely on performance," pointing out, "Small and medium securities firms operated mainly in PF subordinated deals during the past low-interest rate phase, but they are now refraining from this, so it is uncertain whether performance improvement to previous peak levels will be possible next year."

Full-scale Launch of ATS... Securities Firms' 'Survival of the Fittest' Depending on SOR Operation Capability

NextTrade, Korea's first alternative trading system, has completed the procedure of receiving final letters of intent (LOI) for ATS participation from about 30 securities firms ahead of its launch in March next year. This includes large firms such as Mirae Asset Securities and Korea Investment & Securities, as well as small and medium-sized securities firms whose participation was uncertain due to issues such as IT system development costs.

In particular, in multiple trading markets, the ability to operate the Smart Order Routing (SOR) system, which enables investors' orders to be executed through the optimal route to fulfill the best execution obligation, is analyzed to become a competitive advantage for securities firms. The best execution obligation requires securities firms to execute investors' orders under the best trading conditions, and the SOR system is designed to automatically fulfill this obligation.

An official from the financial investment industry said, "Investors will naturally flock to securities firms that execute optimal trades. Just as brokers who understand the needs of buyers and sellers in the real estate market are popular for facilitating transactions, securities firms that swiftly grasp real-time market conditions and provide satisfactory services to investors will secure brokerage," adding, "As time passes and data accumulates, differences in capabilities among securities firms will emerge. Securities firms that execute trades quickly at better prices will gain investors' trust." He further added, "The competition among securities firms following the emergence of the alternative trading system is expected to contribute to revitalizing the market. There is significant potential for increases in trading volume and transaction value."

This content was produced with the assistance of AI translation services.