South Korean securities firms are facing a critical juncture as brokerage revenues decline, forcing a reassessment of traditional business models. The shift comes as domestic stock market trading volume has decreased, impacting profitability for companies heavily reliant on commission-based income.
According to data from the Korea Exchange, the daily average trading volume on the domestic stock market fell to 17.246 trillion won this year, down from 19.137 trillion won in 2023. This contraction in trading activity is particularly challenging for securities firms that prioritize retail brokerage services, as their earnings are directly tied to market fluctuations. The traditional model, where increased trading volume automatically translated to higher profits, is no longer consistently reliable.
The decline in brokerage revenue is not viewed as a temporary cyclical adjustment. The surge in trading activity experienced during the “Donghak-geumi” (East Folk Investment) boom – triggered by the COVID-19 pandemic – proved unsustainable. Factors such as high interest rates, persistent inflation, and a slowing economy have dampened market enthusiasm and reduced individual investor participation.
A recent report from the Korea Capital Market Institute (KCMI) highlights the intensifying competition within the brokerage service market. The report notes that the market has grown in scale due to increased participation from individual investors and expanding investment in domestic ETFs and U.S. Stocks. Simultaneously, the entry of new securities firms and the expansion of services to overseas securities have structurally altered the landscape. This combination of expansion and structural change has intensified competition, leading to a decrease in commission rates for both domestic and overseas securities trading. Domestic stock trading commissions have fallen by approximately 4 basis points, while overseas securities commissions have decreased by around 17 basis points since 2017.
However, the KCMI report raises questions about the effectiveness of further price competition, given that commission rates for domestic stocks currently stand at around 4 basis points, and for overseas securities, around 8 basis points. Securities firms are increasingly exploring non-price factors to attract and retain customers, recognizing that price alone may no longer be a decisive factor in client acquisition or retention.
The changing dynamics are prompting securities firms to seek alternative revenue streams beyond traditional brokerage services. The industry is moving away from a reliance on commission-based income, with firms exploring opportunities in areas such as investment banking, wealth management, and proprietary trading. The shift reflects a broader recognition that the brokerage model is no longer sustainable in the long term.
As noted in a recent report by the Financial News, the traditional “golden goose” of brokerage revenue is losing its luster. Securities companies are now grappling with how to prepare for a future where brokerage income is less predictable and less substantial. The focus is shifting towards diversification and the development of new revenue sources to ensure long-term viability.
