FSA Exemption Set to Lure Buy Side Investors To Japan’s ATSs

Terry Flanagan

Chi-X Japan and other alternative exchanges in Japan have scored a major coup, receiving an exemption from the country’s regulator, the Financial Services Agency, from the takeover bid (TOB) rule.

The TOB rule requires investors who approach a five per cent stake in a company’s outstanding shares to launch a tender offer if they are trading off-exchange, causing many participants to have concerns for inadvertently breaching the rule when trading on a proprietary trading system (PTS), as alternative trading venues are known in Japan.

In June, in an effort to drive competition due to the pending merger between the Tokyo and Osaka stock exchanges, which has since been completed, Japan’s FSA announced the abolishment of the 5% TOB rule applicable for PTSs, which was due to take effect this week.

The Tokyo-Osaka merger provides the impetus for regulators to increase competition. By exempting Japan’s two PTSs—Chi-X Japan and SBI Japannext—from the TOB rule, the FSA is supporting market fragmentation and more foreign order flow to be directed into the PTSs.

“Due to recent changes in market structure, the number of places a firm needs to look has grown considerably,” said Jess Haberman, director of compliance at Fidessa, a trading technology firm.

“With dark pools and broker-crossing networks not being transparent, firms don’t know if liquidity is available on those markets and they must decide between the chances of getting a better price in a dark market versus the guarantee of getting the order filled in a lit market,” he said.

Although PTSs were introduced in Japan in 1998, it was not until recently that the PTSs had wrestled significant market share away from the incumbent exchanges, exceeding the market share of Osaka for the first time in the second half of 2011.

The two PTSs, Chi-X Japan and SBI Japannext, have now crossed the 7% by traded value of the Nikkei225, according to a July report by independent research broker ITG.

“Chi-X has long advocated for harmonized rules across venues that support fair and equal access for all investors,” said Yasuo Hamakake, chief executive of Chi-X Japan, in a statement.

“We have received an overwhelmingly positive response from new buy-side and retail participants, as well as from our existing trading participants, who recognize the benefits of trading on our venue,” he said.

Originally, the 5% TOB rule was intended to prevent investors from secretly executing large transactions off-exchange by requiring transactions totaling more than 5% of the outstanding shares of a company to go through a tender offer process.

Since PTS transactions are considered off-exchange, many professional investors chose to stay away from them out of fear of triggering the 5% TOB rule, according to ITG.

“Effectively, this proposal will grant exemption from the TOB rule to PTSs and allow for larger investors to fully participate in trading activities on these venues,” said ITG.

Exchanges are expanding their infrastructure services on a global scale, offering data center co-location and market data feeds to enable international trading.

In Japan, NYSE Technologies, the technology arm of exchange operator NYSE Euronext, has extended its footprint with its Tokyo global liquidity center, part of a strategic vision for creating a globally connected “ecosystem” that offers greater connectivity to markets and access to liquidity in key trading destinations around the world.

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