The three-phase reduction in tick sizes on the Tokyo Stock Exchange (TSE) that begins in January 2014 is causing concern among some market participants over the ability of trading infrastructure and smaller brokers to handle the changes, as well as the effect on proprietary trading systems (PTSs).
TSE plans to initiate Phase I of the plan in January 2014, when a pilot programme of the TOPIX 100 constituent stocks will have their tick sizes reduced to ¥1. Tick sizes currently range from ¥5 yen on stocks priced between ¥3,000 and ¥5,000, up to ¥100,000 on stocks priced at more than ¥50,000,000. Tick size for a stock such as Toyota – currently trading just above ¥6,000 – is ¥10. During Phase I, tick sizes will not be reduced to below ¥1. In July 2014, providing Phase I goes smoothly, tick sizes will be further lowered, to decimalised units, down as far as ¥0.10, bringing TSE in line with other major global markets.
According to the TSE, Phase III is scheduled for the middle of 2015, when the exchange will “re-examine the reduction in tick sizes based on the impact on trading conditions and execution costs in Phases I and II.”
“Through implementing narrower tick sizes, we expect to bring investors the benefits of price improvements due to lower spread costs,” says Noriyuki Kikuchi, deputy director of the equities department at TSE.
Kikuchi also points out that TSE has conducted numerous hearings with market participants many times before creating the multi-stage plan for reducing tick sizes, “put the matter before The Market Structure Committee,” and opened the proposals up to public comments.
“We will keep explaining the change to market participants, information vendors and everyone concerned, in order to achieve a smooth transition to the new tick size,” says Kikuchi.
Nevertheless, concerns continue. Mid-tier brokers, many of which can’t currently accommodate decimalised tick sizes on their trading systems, are facing multi-million dollar investments to get up to speed for a change some feel will bring little benefit to them.
“The TSE is not listening to its own members,” says one market participant, who asked not to be identified, suggesting that “some mid-tier brokers could get wiped out.”
Another issue that some in the industry feel hasn’t been given sufficient consideration is the increase in quotes sent to the exchange that is likely to accompany the changes. While the exchange is predicting a 30% rise, some participants point to the exponential growth in quotes seen in U.S. markets when tick sizes were reduced there. If quote numbers were to rise to that extent, there are questions about whether the trading infrastructure would be able to cope.
Meanwhile, lower tick sizes may turn out to be a double-edged sword for the PTSs. An increase in the number of smaller brokers which would be able to handle decimalised pricing would grow the potential client pool of Chi-X and SBI Japannext, but erode their main advantage over the main exchange. The two PTSs have attracted business over the last few years largely off the back of offering tick sizes a fraction of those on the TSE.
“If the TSE over the next 12-18 months can implement an efficient, mid-tick price and intra-tick pricing, it’s really going to put pressure on the PTSs. The challenges for the PTSs – and this is not just Japan, it’s globally – is that they have made the sacrifice of ultra-cheap pricing for growth,” says Keith Ducker, CIO of agency broker TORA. “And you saw that with Chi-East, because even if they had 80% market share, they couldn’t make any money.”
“So I think you’re going to see a little of that raise its ugly head in Japan also as the competition from the incumbent exchange puts pressure on them.”