Just back from an interesting week in Japan where I was presenting at the annual GMAC conference, Japan International Banking & Securities Systems Forum. The impact of Japan’s alternative venues (known as PTSs) was a particular area of discussion, especially now that Chi-X has set up in Australia and with Korea looking to introduce a multi-market structure too.
It’s been a hard slog for the alternative trading community in Japan, however, as they have had to battle without the assistance of a formal concept of best execution as enshrined by America’s trade through rule or MiFID’s principles based approach. On top of this, the PTS community also has to negotiate some tricky Financial Services Agency regulation. The first is known as the 5% TOB rule which basically states that any investor that amasses 5% of a firm’s stock through OTC trading must then mount a full takeover bid for that firm. On the face of it, this is a sensible attempt to ensure that corporate takeovers are undertaken in the full light of day. The problem is that when the PTS concept was originally formulated, the new venues were designated as OTC venues. The net effect of this is that many Japanese investment firms are reluctant to buy stock on PTSs just in case they might trigger the takeover rule. On top of this, any PTS that amasses 10% market share must automatically apply for full exchange status.
Despite this, as the chart below shows, the combined share of Chi-X Japan and SBI Japannext in the Nikkei 225 hovers around 6-7%.
This is usually enough to ignite the fragmentation touchpaper, as a critical mass of brokers then invests in the appropriate smart-routing technology. A further stamp on their growing legitimacy is the fact that the JSDA has rescinded earlier restrictions that prohibited participants from using PTS venues in the event of the primary market failing.
If they are to really grow, however, Chi-X Japan and SBI Japannext still have some politicking to do. They should be helped in this by the fact that the OSE/TSE deal looks (almost) certain to go ahead and so the market will be even more wary of the monopoly power of the combined Japan Exchange Group.
So maybe, at long last, things are really changing and Japan will become the land of the rising sun for alternative venues.
As always my thanks to the management and staff at Fidessa kk for all their kind hospitality during my stay last week.
