Japanese regulators are set to ease restrictions on alternative trading platforms, in an attempt to make it easier for new markets to compete with a merged Tokyo Stock Exchange and Osaka Securities Exchange.
As it stands, investors are required to make a full takeover bid if they acquire more than 5 per cent of a company through off-exchange transactions with more than 10 shareholders.
Now, as Japan’s Fair Trade Commission weighs the TSE/Osaka merger, that law will be revised from October, putting alternative venues – known as proprietary trading systems in Japan – on an equal footing with existing exchanges.
An official from Japan’s Financial Services Agency said this regulation should “vitalise” PTSs.
Brokers agreed: “We know that the more conservative, traditional investors have been either only placing sell orders on PTSs, or not trading at all, for fear of accidentally going over that threshold,” said Jessica Morrison, head of Asia Pacific market structure for Deutsche Bank in Hong Kong.
The combined market share of Japan’s two leading PTSs – SBI Japannext and Chi-X Japan – have stalled at about 5 per cent of trades in Nikkei 225 stocks, according to Fidessa. While that is high by Asian standards, it is well short of the penetration enjoyed by alternative trading venues in other developed markets in Europe and the US.
Owners of PTSs in Japan applauded Tuesday’s move, but cautioned that regulators still need to do more to create a level playing field. If a PTS reaches a 10 per cent share of overall market trading, or 20 per cent of any one stock, it has to apply for formal exchange status, for example. Retail investors trading on margin are still banned from accessing PTSs altogether.
“From the perspective of best execution, every investor should have the option to purchase a security at the best possible price, regardless of venue,” said Yasuo Hamakake, chief executive of Chi-X Japan.
The two PTSs claim that their tighter bid-offer spreads save investors an average of between 7 and 9 basis points on every trade, compared with transactions on the Tokyo exchange.
Japan’s FTC is expected to rule on the TSE/Osaka merger by mid-September, allowing the two to combine from the beginning of next year.
The government wants to create a “comprehensive exchange” by 2013 to regain the country’s role as Asia’s financial hub by 2020, according to a 2010 strategy document. -By Ben McLannahan