Last week's announcement of the demise of alternative venue pioneer Kabu.com surprised few in the Tokyo market, though the official explanation given by the company for why it will cease operations at the end of next month did raise a few eyebrows.
Kabu.com opened its proprietary trading system (PTS) back in 2006 with the aim of attracting retail investors who wanted to trade equities (its name means stock or share in Japanese) in the evening after the Tokyo Stock Exchange (TSE) had closed. Taken over by Japanese financial giant Mitsubishi UFJ group in 2007, the platform went on to bring institutional investors on board.
In a statement last week regarding pulling the plug on its PTS service, Kabu.com cited the TSE's introduction of the arrowhead platform in January 2010 as a reason for its failure to gain market share, saying the resulting faster and cheaper trading on the main exchange reduced the need for alternative venues.
“That's decidedly not true,” says a Tokyo-based market participant source who asked not to be identified. “Kabu just couldn't attract enough volume to reach critical mass.”
Market share data certainly appears to bear this out. The two leading Japanese PTSs, SBI Japannext and Chi-X Japan have repeatedly posted record volume figures this year.
SBI Japannext recently recorded a peak market share of 2.9% of TSE's turnover – up tenfold in a year – and co-CEO Chuck Chon says the PTS is “targeting 5% market share by October and 10% by mid 2012”.
Meanwhile, Chi-X Japan celebrated its one year anniversary last month with a 2.7% share of Nikkei 225 trading volume, worth ¥530 billion.
For its part, Kabu has struggled to break the 0.1% market share barrier. According to the market participant, many of the major users of Kabu were not satisfied with its fill rates or provision of market data.
“In addition to this, Kabu charged a monthly fees to users, which when the low fill rates were factored in, made trading costs up to 50 times higher than trading in the market,” explained the source.
SBI Japannext also charges a monthly fee, but the superior fill rates means overall costs are far lower than Kabu, according to the source.
Kabu has also struggled with an anaemic domestic retail equities sector, which has shown no discernible signs of recovery or vitality in recent years. Retail investors should have been Kabu's backbone, which would have in turn attracted high-frequency traders and other sophisticated traders that would have relished the chance to access such liquidity.
Even in a sector where fragmentation is seen as one of the positives of a marketplace, Kabu's exit is provoking little sorrow.
“Because of the way the PTS licenses work in Japan, all the venues essentially have to offer the same thing. So Chi-X and Japannext are more than enough,” said the market source. “If they could provide some variety of service I'd be happy to have 50 of them. But as it is, each extra one is just an additional cost.”
Author: Gavin Blair