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Introduction of DARK POOL to Korea: Panacea or Poison?

The debate on financial regulation, especially on the development of electronic communication technology, and increased desire for customized OTC derivatives is hotter than ever. From all these things, we can easily find that financial environments are varying increasingly faster and faster. After a couple of global financial crisis, global financial institutions debate about financial deregulation and investor safety. At a glance, however, to discuss about financial deregulation doesn’t seem to be appropriate. Many people think that we don’t remedy or cure to our financial market yet. Moreover, the role of traditional clearing house is more ambiguous than ever due to the technology development.

In fact the purposes of financial participants is meeting their desires. These desires are largely classified as two groups: hedging their own risks and meeting their customized needs. Former is usually considered by those who are going to regular market and second to OTC market. In traditional OTC market, the participants should find counterpart to sell or buy financial products. In this case, participants are exposed to many risks such as order exposure, scarcity of potential demand, information asymmetry, and the price differentiation. These problems are more serious when participants want to buy or sell massive amount of financial products.

Let’s assume that we want to sell a lot of financial products. If this trial is known to market participants, then the price of our financial products will decrease and, therefore, distort regular price of financial products not by their change in fundamental value but by just mismatch in demand and supply. This scenario is not desirable to both of participants, buyer and seller, of course financial supervisor. Thus those who want to have transaction with massive amount need another dealing method. This is why the DARK pool has been introduced.

In brief, the DARK pool is one of the ATS – alternative trading system – especially used to deal with massive transaction. Of course there was a way to meet the needs of massive transaction before introducing DARK pool. However, it was still was not comfortable for participants because there were exposed some risks such as information asymmetry between broker and the end of user caused by public order system. To remedy this problem, DARK pool adapted anonymous system. Therefore, DARK pool has been served as the clearing house and the frequency of massive transaction by DARK pool was increased over global market.

In this trend, KRX – KOREA EXCHANGE – installed ATS system, or K-BloX. This system meets some requirements of ATS such as anonymity, massive transaction, extra business hour transactions (시간외 매매). According to the report about transactions through K-BloX, most of transactions were Cross transaction which has anonymity because the participants rely on financial institution as if there is wall between seller and buyer.

The amount of transaction through K-BloX has increased steeply. In 2007, total amount of massive and extra business hour transaction was 43.6 trillion won and this was increased by 49.7% relatively to 2006. This reflects that the function of extra business market has fertilized which can meet the transaction demand of investors.

Extra business market 2005 2006 2007
Total amount(growth rate) 25.454 trillion won(+46.4%) 29.1763 trillion won(+14.6%) 43.6708 trillion won(+49.7%)

 

This uprising trend has not changed when we include business hour trading. Total massive volume of transaction are as follows.

  2007(A) 2006(B) Growth rate (A-B)/B
Payment Volume Payment Volume Payment Volume
Extra business hour(daily average) 327,822(1,332) 1,030(4.2) 213,064(862) 702.4(2.8) 53.9%(54.5%) 46.6%(50.5%)
Business hour(daily average) 98,242(399) 244.1(1.0) 50,102(202) 153.4(0.6) 96.1%(97.5%) 59.1%(66.7%)
Total(daily average) 426,064(1,732) 1,274.1(5.2) 263,166(1,065) 855.8(3.4) 61.9%(62.6%) 48.9%(52.3%)

 

According to these trends, Rep. of Korea’s DARK pool is increasingly hotter because of the desire of investors. The purpose of regular clearing house is risk sharing between participants, whereas that of OTC is the satisfaction of participants’ needs. ATS is one of the transactions classified into latter one. Thus, permitting ATS may aggravate the financial market by increasing many risks and it also be burden to financial supervisory authorities. However, Financial Services commission has made many market-friendly and diminishing-risk policies. We can look forward to see wise policies made by FSC.

Kyongchae Jung

Coolman0828@yonsei.ac.kr

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