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Japanese Regulator May Lower Barriers to Alternative Trading

Japanese regulators may consider rule changes to make it easier for alternative stock markets to compete with a merged Tokyo Stock Exchange Group Inc. and Osaka Securities Exchange Co.

SBI Japannext, Chi-X Japan Ltd. and other new venues that display prices handled 5 percent of the trades in Topix Index stocks last year, the most since the platforms started in 2007, data compiled by Bloomberg shows. Still, growth in Japan lagged behind similar venues in Europe and Canada because of rules that treat the platforms differently from traditional bourses, according to Deutsche Bank AG and Nomura Holdings Inc.

“Proprietary trading systems serve an important market function,” Kosuke Yokoo, director for Collective Investment Schemes at the Financial Services Agency, Japan’s securities regulator, in Tokyo. “We don’t currently have plans to change the rules, but we’ll monitor the situation surrounding the PTS, including looking at growth and the impact of the TSE-OSE merger on the market.”

Japan’s Fair Trade Commission and the securities regulator are reviewing a merger announced Nov. 22 between the 133-year-old Tokyo Stock Exchange and its Osaka rival, the country’s two largest bourses. Deals worth $37 billion have been proposed between the world’s biggest exchanges in the last 15 months, with most meeting resistance from regulators on grounds that they stifle competition.

‘Best Execution’

“The FSA are rightly thinking about liquidity from the perspective of the end-investor,” said Jessica Morrison, head of Asia Pacific market structure for Deutsche Bank in Hong Kong. “Making liquidity on alternate venues sufficiently accessible to all market participants, in order to provide best execution, is an important and worthwhile priority to pursue.”

Regulatory impediments are hampering growth on Japan’s newer venues, Morrison said. For example, investors are required to make a takeover bid if they acquire more than 5 percent of a company through off-exchange transactions with more than 10 shareholders, she said. No such rule exists for shares bought on the main bourses.

“If you wanted to put PTS on equal footing with the exchanges, you’d have to get rid of the 5 percent rule,” Sadakazu Osaki, head of research at Nomura Research Institute Ltd. “It would be a good thing if the Financial Services Agency supported an FTC judgment by encouraging the competitiveness of the off-exchange platforms.”

Deutsche Boerse, NYSE

Deregulation of proprietary trading systems might be part of deal that allows Japan’s Fair Trade Commission to approve a merger between the Tokyo and Osaka bourses, Osaki said. Tokyo Stock Exchange handles 89 percent of the trading volume on the Topix index, while Osaka is the only Japanese venue for trading futures on the Nikkei 225 Stock Average, according to data compiled by Bloomberg.

European Commission antitrust regulators will probably block a merger of Frankfurt-based Deutsche Boerse AG and NYSE New York-based Euronext, two people familiar with the talks told Bloomberg on Dec. 21. The takeover would put more than 90 percent of the European exchange-traded derivatives market and about 30 percent of the region’s stock trading in the hands of one company.

So-called proprietary trading systems accounted for 28 percent of Europe’s trades last month. After only 5 years in business, Chi-X Europe Ltd. is on the verge of becoming the region’s biggest bourse. The platform, now owned by Bats Global Markets Inc., handled more shares than London Stock Exchange Group Plc. in three of the last five months, according to the Federation of European Securities Exchanges.

Chi-X Canada handles about 11 percent of the volume in the country’s markets, the company said in a December report.

“Japan has the liquidity and technological capability to develop into a market as diversely competitive as the U.S. or Europe,” Morrison said.

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