PTSs shouldn’t celebrate too soon
While alternative venues in
Japan are claiming a victory with the relaxing of a key rule which was
restricting their growth, there are still many more obstacles in their path,
warns Hiroshi Matsubara, marketing director of trading technology firm
Fidessa’s Tokyo office.
Last week, the Japanese
Financial Services Agency (FSA) drafted revisions to the Financial Instruments
and Exchange Law, which forces investors that approach a 5% stake in any firm
to launch a tender offer. Such a rule has made it difficult for some
participants to trade easily on proprietary trading systems (PTSs) for fear of
accidentally breaching the rule.
very exciting news for the electronic trading community in Japan,” says Matsubara,
explaining the 5% ‘tender
offer bid’ (TOB) rule
itself was not abolished as such, but PTS trading will become exempt from
agrees with market consensus that the rule change will boost the development of
PTS trading in a market undergoing a period of rapid change. A merger between
the Tokyo Stock Exchange (TSE) and the Osaka Securities Exchange (OSE) was
announced 22 November and is currently slated for January 2013. PTSs are trying
to build market share and define themselves in this changing environment.
“A lot of
domestic buy-side trading desks currently either don’t trade on PTSs or only
trade sell orders, mainly because of the 5% TOB restriction,” Matsubara
says. “If this change
becomes effective from October as planned, I would personally project the PTS
trading share – which currently hovers around 6% – will
reach 10% or beyond by summer next year.”
the two major PTSs lost some of their recent gains, dropping to a collective 5.29%
market share from 5.89% a month earlier. SBI Japannext’s market share increased
to 3.62% from 3.43%, while Chi-X Japan’s fell to 1.67% from 2.46%. The TSE
regained a sliver of market share, claiming 90.48% – up from 89.86% in May.
believes high frequency trading (HFT) firms are also excited about the regulatory
relief and are perched to inject more liquidity into PTSs.
market-making perspective, more trading participation will mean more market
takers flowing in. Therefore, market-making HFTs will be ready to more
aggressively market-make in PTSs,” says Matsubara. “This will lead to more trading
values on PTSs.”
PTSs’ small average trading size in comparison with the TSE, Matsubara sees a
question mark over how well they can effectively handle the relatively larger-sized
orders which typically come from Japan’s domestic buy-side firms.
identifies margin trading as another restriction on the alternate venues.
that a lack of margin trading is blocking more order flows by individual
investors,” he says. “This may be true, but I’m not sure if private investors
are ready to take a benefit of PTSs yet.”
relaxation is the second favourable rule change for PTSs this year. In April,
the regulator decreased the circumstances in which it would halt the trading of
securities on PTSs following market backlash over its handling of a technology
glitch that halted trading for nearly four hours on the TSE.
But Matsubara thinks the next big hurdle for PTS development will be Japan’s 10%
trading share restriction, which requires venues to get an exchange licence
if they trade more than 10% of national volumes.
take a bit more time for PTSs to reach this mark, but this will be the big
challenge for PTSs and it remains to be seen if the FSA would be ready to relax
this restriction,” says Matsubara. “An exchange licence would be a big cost for a PTSs, and as soon as it
became an exchange, a PTS would have no instruments to trade,
because Japanese exchanges are only permitted to trade instruments listed on
their own exchange!”
Matsubara thinks the restriction should be relaxed somehow, either by changing
the ceiling limit or changing the rule of exchange itself, which was the
experience in the US. But in any case, while the lifting of the 5% TOB
restriction was good news, the coast is not yet clear for rapid PTS expansion.