Shift away from Japanese equities poised to continue – Greenwich

The commissions paid for Japanese equity trades fell 20% year-on-year in 2010, mainly due to a growth in electronic trading and a broadening of portfolios by domestic Japanese institutions.
By None

The commissions paid for Japanese equity trades fell 20% year-on-year in 2010, mainly due to a growth in electronic trading and a broadening of portfolios by domestic Japanese institutions.

The findings come as part of report from consultancy Greenwich Associates titled ”Japanese equities: Institutional trading slows, again', which questioned 469 market participants comprising portfolio managers, traders and derivatives users. While the paper highlights that an improvement of market conditions in 2010 compared to 2008/09 led to a slowing of the reduction in Japanese equity valuations, it was not enough to reverse the decline, with the value of Japanese equity assets under management held by buy-side firms in Asia falling by 6% between Q3 2009 and Q3 2010.

“A lack of conviction among investors about the strength of the recovery prompted institutions to keep capital on the sidelines, and trading volumes in both equities and fixed income suffered,” read the report.

The lack of confidence in Japanese equities has also led to domestic Japanese institutions reducing their allocations to local equities, in favour of international equities. The paper predicts that this trend is set to continue, with the number of Japanese institutions planning to reduce allocations to local equities expected to be seven times larger than those planning to increase.

“Institutions are broadly working to de-risk their portfolios, which in many cases entails shifting assets out of equities and into fixed income and other lower-risk asset classes. At the same time, they are working to reduce home bias in their investment portfolios, which entails shifting out of Japanese securities and into other Asian and global investments,” said Tomio Sumiyoshi, consultant, Greenwich Associates and co-author of the report.

The study anticipates an upward trend of electronic trading in Japan, which is likely to further increase the pressure on broker commissions. Approximately 39% of Japanese equity trading volume was executed using low-touch automated methods in 2010, the same level as in 2009. Of this 39%, algorithmic flow accounted for 12%, portfolio trades accounted for 16%, 9% was done via DMA and 2% was transacted in non-displayed venues.

“By 2013, institutions expect the share of their Japanese equity trading volume executed through traditional “high-touch” broker trades to fall to 53%, and even lower to 46% among larger funds,” said Greenwich Associates consultant and co-author of the report John Feng. “This shift towards greater use of electronic trading is consistent with trends in the US and European equity markets.”

Feng added that while the pressure on commissions is unlikely to result in consolidation between Japanese brokers, he did expect them to put an emphasis on efficiencies.

“It's hard to see consolidation among brokers as there hasn't been much of this over past decade, with a few small exceptions,” he said. “It is more likely that brokers will look for ways to manage the business more efficiently, such as ensuring that services are only delivered where they are required.”

The report also included rankings of brokers for Japanese equities in terms of market share and the quality of service they provide to Japanese and Asian institutions. Brokers are identified based on the weighted share of research/advisory votes by respondents and the trading commissions allocated to individual brokers by institutions. Nomura was ranked highest in both categories, garnering a 17.7% share of total research and advisory votes and a 16.5% share of equity trading quality. Daiwa was in second place for both categories with 11.7% for research and advisory and 10.7% for equity trading quality.