Conditions for the Success of the 2nd Exchange

Expectations are high for the establishment of a “second exchange.” The emergence of a new exchange could invigorate the market. But judging by the way it is currently being pursued, there is little reason for optimism. The problem lies in an arrangement of sharing the pie and in the limits of regulation.

Despite the name “alternative trading system,” its role is highly restricted. The system is being designed not to compete with the Korea Exchange, but to pursue a complementary relationship with it. Competitiveness comes from competition. If competitive pressure and institutional diversity are hard to achieve, it is difficult to expect any improvement in competitiveness.

Exchanges have failed. Companies have not grown or generated profits through the exchange, and investors have not earned returns through it either. The exchange has stood above market participants and imposed one-sided rules. The problem has been the operation of the exchange through a system centered on direction and control. A market cannot be energized through one-sided orders and directives. Ensuring soundness is even more difficult.

Because the law allowed a monopoly, the limitations of the existing exchange have been significant. If entry had been permitted so that anyone could establish an exchange with diverse systems at any time, the harms of monopoly would not have been so great even if one exchange held a dominant position. The problem is that the government has granted a monopolistic position by law. That is because most of the harms of monopoly arise when the government confers monopoly status through legislation.

If exchanges with diverse systems were allowed, harm to the parties in a transaction could be reduced. But if an exchange is created in the same manner and limited to complementary trading, that would amount only to a segmentation of exchanges, not to a structure that can reduce the harms of monopoly.

The financial authorities should take another look at why exchanges have failed up to now. An exchange is a market. The essence of a market is spontaneous order. In other words, there must be freedom of choice. If the government imposes a uniform order of its own making and coerces market participants to follow it, traders will find it difficult to succeed. The system must move away from bureaucratic methods and develop in tandem with the growth of the parties to transactions.

What matters first is the kind of trade that companies and investors want with each other. This is the foundation for raising market vitality. As long as the financial authorities regard market participants as existing to carry out transactions according to official direction and control, the market’s function will remain limited and the development of economic actors will be difficult to expect.

The market itself embraces the evolution of institutions and thus moves toward a better and more progressive world. Our exchange, however, merely enforces the uniform systems desired by government authorities and has failed to internalize institutional evolution and diversity.

The establishment of a “second exchange” can succeed only if it becomes an opportunity to develop a system that allows companies and investors freedom of choice. The rules of the exchange must be optional. Companies and investors should be able to choose which exchange will allow them to succeed more.

Freedom of choice drives institutional evolution. I hope the emergence of a second exchange will expand into a system that broadens the freedom to do business and the freedom to invest.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 제2거래소 성공의 조건

Author: Sung-no Choi

Date: 2023-04-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=25518