FRAGMENTATION share was 2.1% by value down from 2.5% in January and 2.9% in December (figure 1). Similarly, SBIJ reported 4.3% of Nikkei 225 value in February, 5.1% in January and 5.8% in December (figure 2). Indeed the PTSs are being affected by the tick size change at the primary. Japan’s PTSs generally lose market share in volatile markets as we saw last May 2013 during the Abenomics bubble. This wouldn’t ordinarily make sense as there would be more opportunities to arbitrage between venues but could be explained by wider spreads in the PTSs. Interestingly, however, is the increasing price improvement observed since STPP went live. SBIJ (figure 4) reports data for its large caps and clearly there are better deals to be had amongst that group. Chi-X J (figure 3) reports in aggregate but it too is exhibiting better price improvement over the past few weeks. Market share may have gone down but higher quality executions are being realized on the PTSs. Turning to average trades sizes in terms of dollars we can see a large decline from more than US6,000 in December to US4,656 and US4,859 for Chi-X J and SBIJ respectively (figure 5). Each declining 23.5% since STPP began. The primary’s average trade size shrank too by 12.5% from US16,921 in December to US14,795 (figure 6) in February according to data from Thomson Reuters Equity Marker Share Reporter. Part of the decline in share price value can be attributed to the market trading lower by around 7.7% but it would seem that smart order routers and black box algos are slicing orders smaller to find pricing inefficiencies.
No we don’t think so. We think this market share contraction is only temporary and the industry will need time to absorb the change. There is still value in queue jumping and finding liquidity in illiquid shares and the PTSs are showing better price improvement to the benefit of the industry. But removal of the tick size advantage will push the PTS to keep improving their product, innovating with pricing schemes or order types which are better suited to certain trading outcomes. Look at Australia. Much of the industry has yet to embrace the value of alternative venues and to justify the cost of multi-market access. This is changing. Rakuten securities, one of Japan’s largest retail brokers, has selected Chi-X SOR technology electing to buy rather than build. Last year’s increased volumes saw commissions increase and there is now some money in the brokerage industry to invest and improve product offerings and services eventually spilling over into accessing the PTS. There are some other regulatory considerations that need to be revised as well. In particular, is that margin trading is not allowed within PTSs. This would provide a significant boost to the alternatives particularly with retail and hedge funds. Of course there is the 10% rule which isn’t being approached any time soon but with some further PTS adoption and margin trading that threshold and its consequences would need further regulatory change as well. More remains to be seen however as the first two months of the year have been filled with holidays nor have we seen the impact of increased volatility as we did last May. Japan’s market is maturing and will only continue to improve execution efficiency going forward. The second stage of the Small Tick Pilot Program will commence 22 July.
Is this the end of the PTSs in Japan?
Highlights Feb 2014 Turnover
Market
Volume billion
Billion USD
Share %
shares
ASX
$69.52
87.93
30.67
Chi-X Australia
$7.17
12.07
4.53
Australia
Trades
Avg Trade
Average Trade
Size USD
Size Shares
15,738,487
$4,418
1,949
2,495,235
$2,874
1,815
Figure: 8
Chi-X Aus Market Share % 1 6.00 1 4.00 1 2.00 1 0.00 8.00
Chi-X continues to hold on to its market share (figure 8) in the low teens having lost around 2% from 14.18% at the end of January to just over 12% at the week ending of 21 February. Notional turnover was up more than 28% on the primary to just over US69.52 billion in February compared to the quieter
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Asia Etrader
n
March 2014
6.00 Chi-X Aus Market Share %
4.00 2.00 0.00 Jul 1 2 201 3 Aug 23 201 3 Oct 4 201 3 Nov 1 5 201 3 Dec 27 201 3 Feb 7 201 4
Source: Chi-X Australia website
WWW.ASIAETRADING.COM