The merger between the Tokyo Stock Exchange (TSE) and Osaka Securities Exchange (OSE), slated for January 2013, is seen as unlikely to deliver touted trading cost reductions, while others believe the new mega-bourse will reduce competition and hamper innovation.
“The merger is just for synergies, to try and reduce costs. It’s not going to do anything to grow the overall pie. The fact that OSE tried to compete with TSE was good for the capital markets in Japan,” says Chuck Chon, co-CEO at SBI Japannext. “The new Japan Exchange Group will have a 94% share of the markets in Japan.”
Robbie McDonnell, Trading Technologies’ VP and MD of Asia Pacific, believes the new group won’t be able to abuse its new dominant position.
“Monopolies are a thing of the past now due to connectivity, and if they did start behaving like a monopoly, then you would soon see a lot of others start offering similar products,” says McDonnell. “It has the potential to be a match made in heaven, but if the consolidation of the two trading systems ends up being delayed for years, then we could end up with the worst of both worlds.”
The two exchanges will have to agree on a common platform if they are to deliver on their promise of reduced trading costs, and the larger TSE’s Arrowhead is likely to be the survivor.
Even that doesn’t guarantee cost savings that will be passed on to market participants, suggests Keith Ducker, CIO at agency broker and trading technology provider TORA. Nevertheless, he is positive overall on the merger.
“It’s a great move for the TSE bringing in the OSE’s strength in derivatives. If you look at any research report, they’ll say that it’s in those kinds of products where the growth is going to be in Asia over the next five to 10 years, not necessarily in equities,” points out Ducker.
Japannext has its own reason to be less than fully enthusiastic about the creation of the new combined bourse.
“The merger was expected but still a disappointment. We were discussing our own merger with OSE but it seems there was pressure from above for the two biggest exchanges to get together,” Chon says.
“Saito-san (TSE CEO) came from the finance ministry and Yoneda-san from the Bank of Japan, so they’re both classic ‘amakudari’ [literally ‘descend from heaven’ – a term for ex-bureaucrats who are given jobs in related businesses or organisations] men with close ties to the government,” suggests Chon.
Chon added that he had a recent meeting with the Nagoya Stock Exchange, which will become Japan’s second-largest exchange after the new Japan Exchange Group, to “see what they’re thinking”.
Japan’s three remaining domestic exchanges, Nagoya, Fukuoka and Sapporo, seem content to be satellite exchanges of TSE, according to Chon, and all run the same Arrowhead system as the main bourse.
A lack of any meaningful rivals may make the dominant exchange complacent and unlikely to undertake the kind of innovations that would enhance its international competitiveness, believes Chon.
“It’s now the PTSs versus the main exchange. I hope that the regulators will recognise this and level the playing field with reforms that make it easier to compete,” says Chon.
“They need to remove the 10% limitation rule [meaning a PTS must become an exchange if they have more than 10% of the volumes on the main bourse]. And also the 5% tender offer bid rule that only applies to PTSs – then we could get all the buy-side clients onboard,” suggests Chon. “And if they would allow margin trading, it would provide big boost to our volumes overnight.”
As to whether the merger will finally bring the global consolidation trend to Asia, remains to be seen.
TORA’s Ducker believes the deal could pave the way for the kind of cross-border tie-ups that have happened all over Europe and in America, while Trading Technologies’ McDonnell is not yet convinced.
“I think we’re likely to see more collaboration across Asia with other exchanges rather than mergers,” suggests McDonnell.
Author: Gavin Blair