Trading Characteristics of Member Firms on the Korea Exchange

In this research, we studied the characteristics of the member firms on the Korea Exchange. The member firms intermediate between the market participants and the exchange, and all the participants trade stocks through members. To identify the characteristics of member firms, we categorized all member firms in terms of the type of investor into three groups, domestic members similar to individuals (DIMs), domestic members similar to institutions (DSMs), and foreign members (FRMs). We examined the dynamics of the member firms, and the trading characteristics of members was revealed through the directionality and trend. While FRMs tend to trade one-way and move with the price change, DIMs are the opposite. In the market, DIMs and DSMs do herd, and the herding moves in the opposite direction of the price change. One the other hand, FRMs do herd in the direction of the price change. The network analysis supports that the members are clustered into three groups similar to DIMs, DSMs, and FRMs. Finally, random matrix theory and a cross-sectional regression showed that the inventory variation of members possessed significant information about stock prices and that member herding helped to price the stocks.