Aug 02, 2010
Should Tokyo move with the times?
There were signs of increasing competition in the Japanese equities markets last week when the Tokyo Stock Exchange (TSE) released proposals for extending its trading day shortly followed by the soft launch of proprietary trading system (PTS) Chi-X Japan on 29 July.
However, with PTSs continuing to provide little competition to the TSE, Hilary Persent, director, execution sales at IND-X Securities, a execution services and commission management platform provider, doubts the need to reform trading hours in Tokyo.
"There are six off-exchange/out of hours proprietary trading systems, as well as the depository receipts market, but their share daily trading volume is very small relative to that of the TSE,” says Persent.
According to data provider Thomson Reuters’ Equity Market Share Reporter, the market share of the TSE has not dipped below 93.7% of the Japanese market by turnover since June 2009.
The proposals put forward in the TSE’s discussion paper are fourfold: abolishing or reducing the lunch recess that currently runs from 11.00 until 12.30; introducing night-hour trading for the cash equities market; extending the evening session hours for the derivatives market; or opening the morning auction session earlier than the current starting time of 09.00.
In its paper, the TSE acknowledged the potential issues that could arise from lengthening the trading day. These included the potential impact on liquidity, for example the liquidity and intra-day VWAP benchmarks generated by the Itayose call auction period that runs during the lunch break, the potential flow from night-time trading, and the possibility for price manipulation that could arise from unsynchronised trading hours between the equity and futures market.
Persent believes that the Itayose auction will barely be missed by market participants and that it is trading activity, rather than price manipulation, that will be the most important factor governing the decision to coordinate trading hours between exchanges trading different asset classes.
"Extending market hours will require changes but the Itayose method for example does not need to be altered. Also, VWAP benchmarks for different trading periods can be easily calculated and adjusted,” comments Persent. “Furthermore, trading hours have always differed slightly between Japanese exchanges and for different asset classes. The real question here is, how will the pricing of derivatives be altered once the relevant underlying has stopped trading.”
Persent points to the Osaka Stock Exchange, which has seen minimal trading in Nikkei 225 futures after 20.00 following the decision to extend its trading day until 23.30 from 20 July.
A more pressing factor, he says, will be the added cost required to handle a longer trading day.
“If market hours became 08.00 to 17.00, for example, participants would have to think about extra staffing and whether any new technology is required,” he says.
But while the TSE may feel safe from the as-yet muted threat from PTSs, Persent believes the introduction of Chi-X Japan could shake things up.
Since its launch in the European market in April 2007, multilateral trading facility Chi-X Europe has become the largest trading venue in terms of pan-European market share and turnover. In June, Chi-X Europe accounted for 17.5% of European trading, worth €149.31 billion according to Thomson Reuters.
“PTSs have, up until now, typically been targeted towards retail clients looking for online trading platforms as a means of accessing the Japanese market,” says Persent. “However, if Chi-X can grow its market share by enticing institutional flow to its platform, the Japanese market could look very different in the years to come.”