FSA exemption opens door to growth for Japanese venues

Japan's Financial Services Agency announced Friday that proprietary trading systems will now be exempted from the country's take-over-bid rule.

Japan’s Financial Services Agency (FSA) announced Friday that proprietary trading systems (PTSs) will now be exempted from the country’s take-over-bid (TOB) rule.

From 31 October, Chi-X Japan and SBI Japannext will be designated as venues on which transactions are exempt from Japan’s Financial Instruments and Exchange Act’s TOB rule, which currently forces investors that approach a 5% in a company’s outstanding shares to launch a tender offer if they are trading off-exchange.

Until now, the rule has caused many participants concern over inadvertently breaching the rule when trading on a PTS.

“Chi-X has long advocated harmonised rules across venues that support fair and equal access for all investors, and today’s announcement is a significant step in the right direction,” said Yasuo Hamakake, CEO, Chi-X Japan, a subsidiary of consortium-owned exchange operator Chi-X Global.

The TOB rule has been seen as a barrier for growth for the country’s PTSs, largely discouraging domestic buy-side investors from participating on Japan’s alternative markets.

“We have received an overwhelmingly positive response from new buy-side and retail participants, as well as from our existing trading participants, who recognise the benefits of trading on our venue, said Hamakake.

Trading on PTSs yesterday showed strong performances. SBI Japannext enjoyed 4.2% market share and Chi-X Japan garnered 3.6% against the Tokyo Stock Exchange’s dominant 92.2% share. Chi-X Japan experienced a month-on-month rise in market share in September to 2.14%, compared to 1.83% in August.

Some of Chi-X’s gains appeared to come at the expense of SBI Japannext, which lost 0.73 percentage points of market share but remained the largest PTS at 3.36%. Total equity trading in Japan reached US$280 billion last month, down on September 2011’s total of US$341.1 billion.

“We remain committed to working with the trading community and providing healthy competition and open discussion to drive positive and informed policy-making change for the market overall,” said Hamakake.

The new rule was initially announced in June. Under the amendments, for PTS participants to be exempted from the 5% TOB rule, they are required to disseminate real-time market data, ensure fair and equal access and use limit-order continuous matching order types.

PTSs are gaining headway against the backdrop of potentially stiffer competition in the future as the Osaka Securities Exchange and the Tokyo Stock Exchange merge. The new entity, tentatively titled the Japan Exchange Group, is to be created in January 2013 and will be the third-largest bourse globally in terms of cash equity volumes after NYSE Euronext and Nasdaq OMX. However, volumes in Japan have been falling even more sharply than many other global markets, with other regional indices posting higher volumes and value gains than Tokyo.