The Tokyo Stock Exchange (TSE) has taken the next step towards its merger with the Osaka Securities Exchange (OSE), after nearly 80% of shareholders in the smaller bourse accepted the TSE’s tender offer of ¥480,000 (US$6,100) per share. However, few believe a mega-bourse will reinvigorate Japan’s sagging capital markets, let alone be “the growth engine of the Japanese economy and the financial hub of Asia” described by TSE president Atsushi Saito.
The deal values the OSE at ¥130billion (US$1.65 billion) and will see five TSE shares swapped for one OSE share. Some market participants have pointed out this amounts to a ‘backdoor listing’ for the currently unlisted TSE, a practise the exchange has been working to eradicate.
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 and Tokyo faces stiff competition from fast-growing exchanges such as Shanghai.
“I do not think that the merger itself will boost Japanese market liquidity, especially for the cash equity market,” suggested Hiroshi Matsubara, marketing director of trading technology firm Fidessa’s Tokyo office. “I am not saying that they should not have been merged, but it will be just a mirage if you expect that the merger will bring in drastic increase of liquidity in the Japanese equities.
“As for this new Japan exchange competing as an Asian hub, again I do not think that the merger itself will make this dream come true. We need to resolve more fundamental issues around the Japanese capital markets for that,” he said.
The merger was “the right move for the management of the TSE and the OSE,” but will do little in the way of market revitalisation, according to Matsubara.
Japan’s two main proprietary trading systems (PTSs) Chi-X Japan and SBI Japannext now account for higher cash equity volumes than the OSE, points out Matsubara, who predicts their trading share to rise to “around 10-15%” over the next 12 months, with the 5% TOB rule scheduled to be abolished by the end of the year.
Both PTSs are giving a qualified welcome to the merger.
“At Chi-X, we are committed to endorsing a framework that positions Japan as a global leader and continues to attract new investors,” said Yasuo Hamakake, CEO of Chi-X Japan. “The merger continues to raise market awareness; with the newly formed ‘mega-bourse’, it continues to highlight the need for a fair and level playing field, where both retail and institution investor can access the best price regardless of venue.”
SBI Japannext CEO Chuck Chon also emphasised the need for a “level playing field so that we can compete meaningfully for the good of Japanese capital market participants.”
Chon also believes “with a precipitous drop in turnover volume at TSE and globally, we need to become creative in promoting the attractiveness of investing in stocks, and work closely together with regulators, market participants, incumbent exchanges, and alternative trading venue operators.”
In the light of another outage on the TSE at the beginning of August – this one halting trading in derivatives for an hour and a half – the role of PTSs as a source of trading continuity has also come to the fore again. Until April, the Japan Securities Dealers Association forbade PTSs from trading in the event of an outage on the main exchange.
“Market participants want stability, so it’s important that alternative venues can continue trading if the primary market experiences an issue,” said Chi-X’s Hamakake.