Daishin Securities (003540), which entered the main-board market-making business for the first time this year, saw its rate of meeting required obligations fall sharply quarter after quarter. With stock market volatility widening abruptly in the first half, the burden on the new entrant grew, and the brokerage is expected to withdraw from the business after just one year.
Daishin met the obligation standards in only one of the 59 stocks it covered as a main-board market maker in the third quarter, according to the Korea Exchange on the 12th. Its compliance rate of 1.7% was the lowest among brokerages that carried out market-making duties during the period. Market makers sign contracts with the exchange and continuously submit bid and ask quotes for stocks with relatively thin liquidity to facilitate smooth trading.
In the first quarter, its first assessment period, Daishin met the standards in 40 of 60 stocks, for a compliance rate of 66.7%. The figure then fell to 27 of 60 in the second quarter, dropping below half as performance deteriorated rapidly. A Daishin official said the firm "had difficulty carrying out the work because of heightened market volatility."
The gap with other market makers was stark. Korea IMC Securities posted the highest third-quarter compliance rate at 87.3%, while Daol Investment & Securities (85.9%), Shinyoung Securities (83.3%) and LS Securities (83.2%) also topped 80%. NH Investment & Securities (80.0%) and Kyobo Securities (78.7%) likewise held at high levels, while Shinhan Securities, which like Daishin began market-making this year, recorded 66.7%.
Industry officials said Daishin had been in talks with the exchange since this summer about halting the business, about six months after starting. The move is seen as reflecting an internal assessment that profitability was low relative to the costs of staffing and system operation. The firm had already decided to pull out of the business in the third quarter, but with follow-up procedures such as trade data processing and fee settlement still pending, Daishin remains on the official list of market makers.
This is not the first time a brokerage has pulled out of market-making. Mirae Asset Securities (006800) terminated market-making contracts covering 115 main-board stocks and 139 KOSDAQ stocks in September last year, in the middle of the contract period. That came about two months after it signed a revised second-half market-making contract with the exchange. An official in the financial investment industry said at the time that "the actual benefits from market-making itself are not large, so brokerages have somewhat less incentive to participate actively."