Japan is facing a curtailment of competition in its equity trading markets, after the Japan Exchange Group removed its rivals' primary competitive edge. The country's two main Proprietary Trading Systems (PTSs), Chi-X Japan which launched in 2010 and SBI Japannext which launched in 2008, have long struggled to capture liquidity from the primary equity market, the Tokyo Stock Exchange (TSE).

 

Since its merger with Osaka Securities Exchange in 2010 to form Japan Exchange Group, TSE has implemented a series of reforms to improve its competitive standing, among the latest being the decimalisation of tick sizes - the smallest increment of price improvement.

 

Japan has a proportional tick size model, in that the tick sizes applied are affected by the value of the stock. For example, a stock priced between ¥10,000 and ¥30,000 would move in increments of ¥10, while a stock priced between ¥30,000 and ¥50,000 would move in ¥50 increments.  The TSE has begun reducing tick sizes, under its Small Tick Pilot Program (STPP), so that they will be 10%, 20% or 50% of the old ones for the same existing respective price buckets.

 

Ross Whittaker, head of AES Japan, at broker Credit Suisse says, "By lowering their tick sizes and normalising their structure with that of the PTS, the TSE has levelled the playing field on this aspect of the trading venue competitive landscape. There were several reasons for the TSE to make the change.  The competitive threat of increased fragmentation was one driver for the TSE.  Another major reason was feedback from the trading community, with both buy- and sell-side asking for the change."

 

Phase 1 has had a significant impact on the market's characteristics, yet despite being billed as an opportunity to lower transaction costs by decreasing spreads, some market participants are warning that the benefits are not yet apparent.

 

The second phase, which is planned for July 2014, will be encompass TOPIX 100 stocks below ¥5,000, which at the end of November 2013 comprised about 75 stocks with about 37.5% of the TSE's turnover. The new tick sizes in this phase will be 10% or 50% of the old ones for each price bucket.

 

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