Japan Removes 5-Percent Takeover Trigger for PTS Venues

Japan’s financial regulator said it will relax from Oct. 31 a rule on stock trades that alternative venues SBI Japannext and Chi-X Japan Ltd. say stifles competition with the country’s biggest bourses.

Trades on SBI Japannext and Chi-X Japan, the only two venues where the public can buy and sell shares away from a traditional exchange, will be exempt from a rule forcing investors to make a takeover bid if they acquire more than five percent of a company through off-exchange transactions with more than 10 counterparties, the Financial Services Agency announced today. The exemption will allow investors to trade on alternative platforms without fear of accidentally crossing the five-percent threshold, Yasuo Hamakake, chief executive office of Chi-X Japan said today.

The policy shift was made to encourage competition as the Tokyo Stock Exchange Group Inc. and Osaka Securities Exchange Co., the country’s two biggest bourses, plan to merge, the regulator said in June. Traditional exchanges are already exempt from the so-called 5-percent rule. Growth of proprietary trading systems in Japan has lagged Europe and the U.S., and the five percent rule is one reason why, Hamakake said.

Changing Strategies

“We have already had some large institutional investors indicate they will be changing their order routing strategies to take advantage of the price improvements available on the exempt PTS venues,” Jessica Morrison, Deutsche Bank AG’s Hong Kong-based head of Asia Pacific said via e-mail today. “We will be monitoring with great interest any moves in liquidity and expect that this will result in greater market efficiency.”

SBI Japannext and Chi-X Japan are the country’s only proprietary trading platforms after Kabu.com Securities Co. shut its service last year.

The two lit alternative venues have handled 5.7 percent of trades on Japan’s Nikkei 225 Index this year through Oct. 19 while dark platforms, or those that do not display prices, accounted for 9.8 percent, according to Fidessa Group Plc, which helps asset managers track transactions. Lit trades are fragmented into 13 different venues for S&P 500 stocks and dark trades account for 31 percent of the market, according to Fidessa.

Chi-X’s Hamakake said he does not expect to see greater volumes come to the alternative venues overnight.

“‘‘We expect to see results into the first and second quarter of next year,’’ he said. ‘‘The buyside community understands the benefit of competition and that there is price improvement on PTSs and they want to take advantage of these trading opportunities.’’

The regulator’s plan to ease restrictions on so-called lit venues follows a decision by the Japan Securities Dealers Association in April to allow the venues to keep trading when activity on the country’s main bourse is disrupted. A Feb. 2 computer malfunction that halted trading on 15 percent of the Tokyo Stock Exchange’s biggest stocks was exacerbated when the association asked alternative venues to stop processing transactions.