With proprietary trading systems (PTSs) steadily taking share from Japan's main bourses, the merger between the Tokyo Stock Exchange (TSE) and the Osaka Securities Exchange (OSE) may yet be completed by the autumn, but it's far from a done deal.
Talks between the two exchanges were due to take place in March, only to be thrown off track by the multiple disasters that hit Japan that month. While the bourses have agreed in principle to merge their management, the takeover by the TSE has hit several sticking points, with the OSE looking to retain some of its autonomy post-merger.
“The deal makes sense on paper with PTSs now taking much higher volumes, which are likely to keep on rising, making the competition tougher,” says Neil Katkov, head of Asia research at consultancy Celent. “One year ago, PTSs were struggling to get much above 1% of the main exchange volumes, since March it’s more like 5% – that’s a significant number.
“But historically the OSE has been fiercely independent and the idea of a merger has been booted around a few times before over the years,” he adds.
The trend globally has been for mergers of exchanges due to the changing technological landscape and pressure to lower transaction costs. However, except for the Singapore Exchange’s failed attempt to takeover the Australian Securities Exchange earlier this year, merger activity in Asia has been limited.
“In Japan the landscape has changed too, with the number of equities exchanges going from around 10 to around four in recent years,” notes Katkov. “In that sense, Osaka is a holdout, and it’s an interesting case because they have their own strategies and way of doing business. While traders may think it’s very conservative not to merge, exchanges like the OSE are very profitable, so it’s not just intransigence.”
The TSE, which is unlisted, wants to go public before the merger, while the OSE – itself listed on the JASDAQ – is against the idea. OSE president, Michio Yoneda, has publicly stated that the two bourses can't merge if Tokyo insists on listing before the deal.
TSE also proposed taking a majority share in the OSE, rather than make it a wholly-owned subsidiary, but that was rejected as a backdoor takeover.
For its part, the TSE is concerned about criticism that taking over the OSE may be regarded as a way of listing without meeting its own requirements before going public.
The OSE, with a market cap of ¥106 billion (US$1.375 billion), is Japan's second-largest bourse, and is keen to retain both its strength in derivatives and some of its independence.
But market participants have voiced their support for the merger, with Tetsuo Mae, head of trade body the Japan Securities Dealers Association, recently urging the two exchanges to push ahead with the merger.
“I want them to do everything they can do to avoid a collapse in talks, Mae told reporters in Tokyo.
Officials from both the TSE and the OSE declined to comment on the ongoing merger negotiations for this article. However at a press conference on 26 July, TSE president Atsushi Saito commented: “We shouldn’t let the [merger] talks drag on longer than necessary.”
Author: Gavin Blair