“Project Turquoise is undoubtedly going to come to Japan,” announced Neil Katkov, group head of research at Celent Japan, the research and consulting firm, speaking at TradeTech Japan 2008 conference in Tokyo today.
Presently, dark pools account for less than 3% of daily volume in the Japanese equities market. This is set to change however, with or without a regulatory following wind, as the Japanese market is forced to bring its trading practices in line with major markets elsewhere. “Global market structure changes are mainly commercially driven,” observed Dan Keegan of Nikko Citi. This could mark the end of Japan’s exchange-driven model as new alternate execution venues dare to compete. “If you wait for change, change will be put upon you,” added Keegan. “Competition is coming and will transform the Japanese market.”
Alternative execution platforms already exist in Japan’s PTS market, with licences available for both institutional and retail investors. However, it accounts for a fraction of the market – its share a little less than 1%.
“The Tokyo Stock Exchange (TSE) has so much liquidity, it’s hard to see it losing market share,” noted Celent’s Katkov. But as hard as it might be, the drive towards best execution coupled with the TSE’s highly publicised technology problems, could prove to be a tipping point, he suggested.
The future structure of the market is already taking shape with tie-ups between the TSE and overseas exchanges such as the LSE, NYSE and Singapore Stock Exchange. Liquidnet, Credit Suisse, BNP Paribas and Merrill Lynch are in the vanguard introducing dark pools. “Competition will grow between exchanges and new liquidity pools,” predicted Katkov, not least because Japanese regulators have already mooted “MiFID-style market regulation”.
“In 2009, we won’t be talking about how to create a competitive market structure,” said Citi’s Keegan, “we’ll be talking about how to further take advantage of it.”