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May 24, 2012, 11:06 p.m. EDT · CORRECTED

Japan electronic trade venues seek regulatory love

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By V. Phani Kumar, MarketWatch

An earlier version of this report misidentified the name of the Japanese securities regulator. The report has been corrected.

Tokyo Stock Exchange

TOKYO (MarketWatch) — Having survived a major shake-out, Japan’s two main electronic trading platforms, SBI Japannext and Chi-X Japan, say they are now ready to provide what is needed to rejuvenate the country’s stock markets: A healthy dose of real competition.

But for that to happen, regulators must first remove some restrictions — specifically targeted at alternative trading venues, and unique to Japan among the major developed economies — that are keeping both institutional and retail investors away.

From next to nothing just two years ago, the two so-called Proprietary Trading Systems (PTS), better known in the U.S. as Electronic Communication Networks (ECN), have steadily increased their combined market share to about 6% of stocks traded in Japan by grabbing a bigger slice of the market, and the investor mind.

Now they are hungry for more, and want a larger share of a market they hope to expand by bringing in new participants and liquidity flows.

“We are trying to attract investors who haven’t been in Japan yet but have been trading actively in other markets, like Europe or the U.S. They are still coming in. … More people will be interested in our venue as volumes increase,” said Yasuo Hamakake, chief executive officer at Chi-X Japan Ltd.

In the week ended May 18, SBI Japannext’s and Chi-X’s market share rose to 3.5% and 2.6%, respectively, from 2.9% and 2.4% in the previous week, according to data from Fidessa.

During the same period, the combined share of the Tokyo Stock Exchange and Osaka Securities Exchange Co. /zigman2/quotes/201068873/delayed JP:8697 +0.28%   — which are currently working to complete a merger they announced last year — slipped to 92.3% from 92.9%.

Battle for market share

The PTSs’ rising influence comes at a time when Japan’s share of market capitalization and trading volumes is on the wane in Asia-Pacific and the wider world, after decades of lackluster economic growth.

According to World Federation of Exchanges data, trading at the TSE comprised 46% of total volumes in the Asia-Pacific in the year 2000. In 2010, that figure had dropped to 20%, as the activity at the exchanges in Sydney, Seoul, Hong Kong and the mainland Chinese bourses of Shanghai and Shenzhen expanded at a much faster clip.

Yasuo Hamakake, chief executive officer of Chi-X Japan

Dealogic data also show that while Hong Kong and Shanghai have consistently ranked among the top four markets in the world in terms of new listings between 2006 and 2011, Tokyo has been much less vibrant as a primary market, falling as far back as the 37th position in the world in 2008.

Both SBI and Chi-X say they welcome — even hope for — greater competition in the PTS space in Japan, as that would increase the size of the pie by bringing in new participants and liquidity.

“If the volume is dropping ... participants will be less interested in Japan,” Hamakake said. “For the sake of investors, for the purpose of Japanese markets’ development, we need [competition.]”

Chi-X Japan, a wholly owned unit of Chi-X Global Holdings LLC that is in turn owned by a consortium of financial institutions including the Nomura Group, is targeting to increase its market share to more than 10% in three years.

SBI Japannext, also owned by a consortium that includes Japan’s SBI Holdings Inc. /zigman2/quotes/200067066/delayed JP:8473 -1.05%   /zigman2/quotes/200913169/delayed SBHGF +0.26%  and Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS +0.19% , is aiming to double its share into the 6% to 7% range this year.

The PTSs are now inevitably setting themselves up against the Tokyo Stock Exchange, which despite its 90% market share, is mindful of the risks and isn’t planning to loosen its grip.

“It’s very important for us to secure 90% market share. In general, it is said that if the market share falls below 80%, it’s going to collapse. … We’d like to keep our share in the mid-80s to 90% [range],” said Hironaga Miyama, managing director at the TSE.

“If the total pie is growing, and they are growing alongside, then it’s fine. But if the pie remains the same, and they are taking away our share, then it’s a problem. We’re not sure how much they will grow in future, but I think we have to improve our systems to compete,” Miyama said.

Miyama said the TSE welcomes competition, but creating a level-playing field — which the PTSs want — would also require that they take on responsibilities such as market monitoring and surveillance that an institution like a stock exchange is accountable for.

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