JSDA re-examines PTS shut-out policy

A Japanese regulator is reassessing its policies for halting trading on proprietary trading systems when there are problems with the country’s primary exchanges.

A Japanese regulator is reassessing its policies for halting trading on proprietary trading systems (PTSs) when there are problems with the country’s primary exchanges.

The Japan Securities Dealers Association (JSDA), a self regulatory organisation for the country's securities markets, came under fire recently for suspending PTSs SBI Japannext and Chi-X Japan from trading in 241 stocks which were halted on the Tokyo Stock Exchange (TSE).

The 2 February outage lasted almost four hours and was due to market data/market information distribution issues. But the technical difficulties would not have affected the PTSs’ ability to trade, and the Osaka Stock Exchange (OSE) did continue trading.

Under the watchdog’s self-regulatory rules, when a Japanese exchange suspends the trading of listed shares and instruments, the JSDA is empowered to ban off-exchange trading at PTSs.

Yet the decision to close down PTSs and leave market participants only one alternative venue on which to trade called into question market participants’ ability to choose their own venue and the fairness of competition in the marketplace.

“JSDA is aware that PTSs are recently increasing their importance, along with the expansion of their trading volume,” a spokesperson for the JSDA told TheTRADEnews.com. “JSDA has acknowledged market participants’ views that such off-exchange trading, which is expected to function as alternative trading means, should not be suspended in an occasion of system outage at exchanges like [that experienced on 2 February].”

Last week, representatives of Japannext and Chi-X Japan met with the JSDA to request the watchdog reconsider its policy on halting trading at PTSs.

“Taking into consideration these circumstances, JSDA intends to re-examine its policy for off-exchange trading suspension in the case of an exchange system outage,” said the JSDA spokesperson.

The regulator said it was ready to “further deliberate” on the issue with its member firms, including PTS operators.

“We are encouraged by JSDA’s response and we will continue to support great co-operation between venues, market participants and regulators,” said Yasuo Hamakake, representative director of Chi-X Japan. “Globally, we have seen alternative venues tighten spreads, increase liquidity and provide great resiliency to the market as a whole.”

Hamakake said in Japan, PTS market share had sometimes reached as high as 9%, accounting for more than 20% market share in certain names.

“Participants are looking to trade on the venue that offers the best price and unique order types, making trading more efficient,” Hamakake said. “Chi-X is committed to further innovation and passing the benefits of competition to our trading participants.”

The breakdown at the TSE occurred at one of the busiest times in Japan’s results season. The night before the interruption, electronics giant Sony posted a US$1.2 billion quarterly loss ‎and rival Hitachi announced a 45% fall in Q3 net profits.

"It's an encouraging sign that JSDA officials do care about levelling the playing field in response to feedback from market participants and venue operators," said Masami Hatakeyama, co-chief executive of SBI Japannext.

A merger between TSE and OSE was announced 22 November and is currently slated for January 2013.

TSE’s Arrowhead trading platform, introduced early 2010, was not the cause of the failure, a spokesperson for the bourse said.