20170427-三星证券-Korea_Post_s_return_to_provide_liquidity_29页_1mb

Derivatives Issue Summary

Core Content

This document analyzes the impact of Korea Post's arbitrage trading activities on the Korean stock and derivatives markets, particularly focusing on the tax exemption period from April 2017 to December 2018. It outlines how the exemption influences market liquidity, price discovery, and the behavior of various market participants, including foreign investors, pension funds, and other institutional players.

Main Points

1. Korea Post's Arbitrage Trading and Tax Exemption

• Tax Exemption Period: Korea Post's arbitrage trading is exempt from transaction taxes from April 2017 to December 2018, providing a significant incentive to increase such activities.
• Trading Products: During this period, Korea Post will expand its arbitrage trading to include mini Kospi 200 futures, Kosdaq 150 futures, single-stock futures, and synthetic futures, which is a broader range than the previous exemption period (2011-2012).
• Impact on Liquidity: The exemption is expected to increase market liquidity by KRW38b-287b, based on the average trading value of the Kospi market over the past three years.
• Price Discovery: Increased arbitrage trading should improve price discovery in both spot and futures markets by narrowing the price gap between them.

2. Arbitrage Trading and Market Structure

• Liquidity Providers: The exemption for Korea Post will challenge established liquidity providers, particularly for mini Kospi 200 futures, single-stock futures, and Kosdaq 150 futures.
• Index Duplication and Tax Cap: Arbitrage traders must adhere to the index duplication rate (95%) and tax exemption cap (within 103% of the first settlement price), which will require optimizing the composition of stock spot baskets and executing orders quickly and accurately.
• Transaction Costs: Lower transaction costs reduce the basis for arbitrage, allowing investors to profit at a lower price differential. Conversely, higher costs increase the required basis.

3. Historical Arbitrage Trading Trends

• 2011-2012 Activity: Korea Post was the most active arbitrageur during this period, contributing over 50% of the arbitrage trading value.
• 2013 Decline: With the expiry of the tax exemption, Korea Post's arbitrage activity dropped sharply, and the foreign investor portion increased from 25% to 66%.
• Market Conditions: A range-bound Kospi market reduced the frequency of over- or undervaluation of futures, which affected arbitrage opportunities.

4. Arbitrage Trading and Market Correlation

• Correlation Fluctuations: The correlation between equity indices and stock groups (e.g., mid-caps, small-caps) changed significantly with taxation status.
• Tax Impact: The correlation between the Kospi 200 and mid-cap stocks weakened after the tax exemption was lifted, indicating that taxation reduces the influence of arbitrage on supply-demand dynamics.

5. Arbitrage Trading and Individual Stock Liquidity

• Liquidity Vulnerability: Stocks with high market cap but low liquidity are more vulnerable to arbitrage pressure.
• Kospi 200 Constituents: In 2011, the top 50 stocks by market cap in the Kospi 200 had an average arbitrage portion of 2-4% of their daily trading value.
• High Exposure Stocks: Companies like Samsung Electronics and Posco, which have high liquidity and weightings in the index, saw their arbitrage portion exceed 4-5% of daily trading value.

6. Arbitrage vs. Non-Arbitrage Trading

• Investor Mix: Taxation had a significant impact on the investor mix in arbitrage trading, discouraging domestic institutional investors and favoring foreign investors with lower funding costs.
• Non-Arbitrage Trends: The portion of non-arbitrage trading increased, with foreign investors playing a larger role in this segment.

7. Implications for the Market

• Liquidity Boost: The resumption of Korea Post's arbitrage trading is expected to increase market liquidity and improve execution ratios and market depth.
• Volatility Risk: Arbitrage trading can increase market volatility, as seen in historical events like the 1987 Black Monday and 2010 Flash Crash.
• Program Trading: The rise in program trading, especially algorithmic trading, has become the norm in Korea, driven by the influx of passive funds like ETFs.

Key Information

• Tax Exemption Impact: The exemption period for Korea Post's arbitrage trading is expected to boost profitability and market liquidity.
• Arbitrage Products: Korea Post's expanded arbitrage products include mini Kospi 200 futures, Kosdaq 150 futures, and single-stock futures.
• Transaction Costs: Lower transaction costs reduce the basis for arbitrage, while higher costs increase it.
• Market Correlation: The correlation between the Kospi 200 and mid-cap stocks dropped significantly after the tax exemption was lifted, indicating reduced arbitrage influence.
• Liquidity Disruption: Arbitrage trading can disrupt the liquidity of individual stocks, especially those with low trading value.
• Foreign Investors: Due to lower funding costs, foreign investors have been more active in arbitrage trading, particularly after the tax exemption for Korea Post expired in 2013.

Summary Table

Conclusion

Korea Post's tax exemption for arbitrage trading from April 2017 to December 2018 is expected to significantly boost arbitrage activity, leading to increased liquidity and improved price discovery in the stock and derivatives markets. However, the expansion of arbitrage products and the need for optimized trading strategies will challenge existing liquidity providers. The document highlights the historical impact of taxation on market dynamics and suggests that the return of Korea Post to arbitrage trading will likely narrow price gaps between spot and futures products, especially for less liquid stocks.