Tokyo allows smaller price increments on some shares to boost trading
Japanese stock exchange fights back for business from private trading venues by reducing the price increments of shares of larger companies
The Tokyo stock exchange began allowing smaller price increments on shares of about 80 of Japan's biggest companies yesterday as it seeks to win back business from private trading venues.
Topix 100 Index members with shares that cost between 1,000 yen (HK$76.50) and 5,000 yen now trade in 0.5 yen price movements, down from one yen. This includes Honda Motor and Japan Tobacco.
Shares priced at less than 1,000 yen, such as Mizuho Financial Group, now move in 0.1 yen bands, a tenth of the previous size.
Investors in Japan were already able to trade in smaller increments using the country's two alternative platforms that display prices, SBI Japannext and Chi-X Japan.
If overall liquidity is boosted … the net beneficiary will be everyone
"This would be the way the exchange looks at fighting back," said Mikey Hsia, a sales trader at Sunrise Brokers. "Naturally this will add to the question whether it benefits one type of market participant over another. But in the long run, if overall liquidity is boosted in the underlying assets we are trading, the net beneficiary will be everyone trading in that arena."
Market makers, the professional traders who facilitate buying and selling shares, lost profits when the United States narrowed tick sizes to pennies from sixteenths of a dollar more than a decade ago. The change, known as decimalisation, was one of the changes that fuelled the rise of electronic trading in the world's largest market.
Today, firms known as high-frequency traders are under scrutiny amid allegations they have rigged trading in US equities.
The Topix 100 gained 0.6 per cent yesterday. Mizuho Financial, the company with the lowest share price on the gauge, closed little changed at 200 yen amid above-average volume. Honda added 0.5 per cent to 3,585.5 yen while Japan Tobacco rose 1 per cent to 3,741 yen.
"I'm relieved to see that [yesterday's] move happened without a glitch," said Nobuyuki Fujimoto, a senior market analyst at SBI Securities, Japan's largest online brokerage. "Mizuho's trading volume was the second-biggest among Tokyo Stock Exchange first section stocks [yesterday]. It looks like it's going as the exchange envisaged in regards to boosting volume."
Yesterday's changes were the second in a three-part plan by the Tokyo exchange to offer better liquidity and shorten waiting times to process orders.
The exchange reduced tick sizes on some shares in January, while keeping the smallest increment at one yen. In the middle of next year the exchange will analyse the impact of the smaller ticks and decide whether to do more.
Supporters of the US testing bigger tick sizes say it will encourage market makers to buy and sell more shares and create conditions that will encourage more companies to go public. Opponents of the change, including Fidelity Investments, say it will cause investors to pay more when they buy the shares of small-cap companies.
A trial, announced last month by the Securities and Exchange Commission, will last a year.
High-speed trading's impact on financial markets was viewed negatively by 50 per cent of those surveyed in a poll this month, compared with 27 per cent who saw it positively.
Dark pools, private venues often owned by brokers that do not publish bid and ask prices, received negative marks from 53 per cent of respondents as opposed to 23 per cent positive.
High-frequency traders are valuable because they add liquidity and the Tokyo exchange had not received any complaints about their practices, Isao Hasegawa, then-director of the exchange's equity department, said in April.
Japan did not have the excessive market fragmentation seen in the US, he said.
Trades through the Tokyo exchange accounted for an 81 per cent share of Nikkei-225 Index transactions last week, according to data from Fidessa's website. SBI Japannext had 4.6 per cent and Chi-X Japan had 2.4 per cent.
"We also expect liquidity to be more concentrated on the [Tokyo Stock Exchange] following the tick size changes with the [proprietary trading systems] losing market share," Daiwa Securities quantitative analyst Mainak Sarkar wrote in a report last month.
