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Japan Alternative Venues Have Best Year as Volatility Jumps

Japan’s alternative equity markets won more business than ever from the Tokyo Stock Exchange as investment funds sought better prices and places to buy and sell when traditional channels failed.

Markets including SBI Japannext and Chi-X Japan as well as dark pools, or venues that don’t display prices, handled 7.8 percent of the volume in Topix Index stocks last year, up from 6 percent in 2010, data compiled by Bloomberg show. That’s the biggest annual increase and the most market share since such platforms were introduced in 2007, the data show.

The venues, known as proprietary trading systems, handled more volume in Tokyo Electric Power Co., Canon Inc. and Olympus Corp. than the Tokyo Stock Exchange on some days, the first time that’s ever happened, because of stock halts and price differences across venues, data compiled by Bloomberg show. The Nikkei Stock Average Volatility Index posted its biggest two-day gain in March after the nation’s largest earthquake and tsunami.

Competition between venues means “both the TSE and the proprietary trading systems have more incentive to improve trading systems and cut trading fees to secure customers,” said Kenichi Kubo, a senior fund manager at Tokio Marine Asset Management Co., which oversees 5.4 trillion yen ($70 billion). “That also enhances status and reliability for the Japanese financial market. All of them are positive for investors.”

Japan was the only country in the Asia Pacific region to allow proprietary platforms to compete directly with traditional exchanges until Chi-X Australia opened on Oct. 30.

Volume Triples

Volume on SBI Japannext and Chi-X Japan since the March 11 earthquake has been triple the level seen in the year leading up to the natural disaster, according to data compiled by Bloomberg. On the Tokyo exchange, trading is about 19 percent below the pace before the quake.

It was “our best year ever in terms of new contracts and installs for Japanese domestic firms,” said Lee Porter, managing director in Asia for Liquidnet Holdings Inc., which operates an anonymous order matching service. “The need for alternative trading options is increasing in Japan as the domestic traders become more comfortable with using non-traditional methods.”

The number of Tokyo Electric shares transacted via SBI and Chi-X’s venues surged in March as orders were delayed on the country’s main bourse in the days following the temblor and nuclear crisis at the Fukushima Dai-Ichi plant. Since then, the two largest alternative platforms that display prices have handled 17 times more shares of the utility than they did the year before, data compiled by Bloomberg show.

Olympus Scandal

Four times as many shares of Olympus traded on alternative platforms on Nov. 10 after the company was put on watch for delisting and the rush of sell orders forced the Tokyo exchange to cancel its opening auction. Olympus Corp., a maker of cameras and endoscopes, was embroiled in an accounting scandal after firing its chief executive officer in October.

Almost 16 times as many shares of eAccess Ltd., a broadband service provider, traded on off-exchange venues as on the main bourse on Aug. 16. The final price recorded on the alternative platforms for shares of eAccess was 7.3 percent lower than the closing price on the Tokyo exchange that day.

More shares of Canon passed through alternative venues on June 27, Sept. 15 and Sept. 29. Unlike the Tepco and Olympus cases, there were no halts on the main exchange or market-moving announcements that would have forced the flow off of the TSE.

Hiroshi Sensaki, chief operating officer of SBI Japannext, said five new brokers are in the process of connecting to the trading platform.

Connecting Clients

More clients have been asking to connect to Chi-X and SBI Japannext, said Perry Pritchard, managing director and head of electronic trading sales for Daiwa Capital Markets. He said they were planning to connect in the first quarter of this year.

While the number of firms and investors using alternative venues will keep increasing, it’s unlikely the number of providers will rise, Liquidnet’s Porter said. One venue,, said in September that it would close because of too little volume.

“While the PTS’s have made some inroads into taking market share from the TSE, it is still relatively small in the scheme of things,” he said, referring to the so-called proprietary trading systems. “Anyone new coming in would need to bring something quite differentiated to make an impact. And the closure of would make any potential entrants think twice.”

Chi-X Europe

Use of off-exchange venues is lagging behind other regions. Chi-X Europe Ltd., the region’s largest alternative trading system, handles more than 30 percent of the value of FTSE 100 Index stocks, according to the London-based company. Chi-X Europe was acquired by Bats Global Markets Inc. in December from Nomura Holdings Inc.’s Instinet unit and more than a dozen brokers.

The popularity of the alternative venues comes as overall trading in Japan falls, leaving more contenders looking for slices of a smaller pie.

Trading in shares of Japan’s biggest companies fell to the lowest level since February 2004 in November, with an average of 1.05 trillion yen ($14 billion) in stock changing hands on the TSE’s first section, whose companies have a median market value of 31.3 billion yen, exchange data compiled by Bloomberg show. Shares totaling 852 billion yen traded on average during December.

TSE Upgrading

The value of Topix index-company shares changing hands on the first three trading days of this year averaged 763 billion yen. The gauge rose 0.1 percent for the week.

Tokyo Stock Exchange spent 2011 making its two-year-old Arrowhead trading system faster and upgrading its information technology infrastructure to capture more electronic and high-speed trading. It has also offered to buy as much as 66.67 percent of Osaka Securities Exchange Co., the world’s No. 3 venue for equity-index futures by number of contracts.

“Technology investment by TSE, such as the recent overhaul of Tostnet and further upgrades to Arrowhead, will not in itself stem the growth of the PTS’s,” said Jessica Morrison, head of Asia Pacific market structure at Deutsche Bank AG in Hong Kong. Tostnet is the bourse’s system for reporting off-exchange trades. “PTS’s could ultimately benefit from a more competitive playing field following the merger, if it triggers any favorable deregulation moves,” she said.

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