(Adds Osaka Securities share price in sixth paragraph.)
Nov. 24 (Bloomberg) -- Tokyo Stock Exchange Group Inc.’s proposed takeover of its Osaka rival may slow market share losses as alternative trading systems capture a growing portion of Japan’s equity business.
The Tokyo bourse traded 88 percent of the volume in Topix Index stocks in the past 12 months, 4 percentage points less than the previous year, according to data compiled by Bloomberg. Alternative venues handled 4.7 percent of Japan’s stock transactions in October, compared with 1.2 percent and 1 percent during the same month in 2010 and 2009, according to data from the Tokyo-based Japan Securities Dealers Association.
Companies such as SBI Japannext Co. and Chi-X Japan Ltd. are taking market share from traditional exchanges by competing on speed and price. The rise of alternative equity-trading venues has helped spur more than $30 billion in proposed industry mergers worldwide, including the Nov. 22 offer by the Tokyo bourse, as exchanges pursue more lucrative derivatives markets and lower costs.
The combination of the TSE and Osaka “will be a stronger and more focused competitor to the proprietary trading systems in Japan,” Tony Mackay, the former chairman of Chi-X Global Inc., said in an e-mail from Hong Kong yesterday. “An exchange that offers trading, clearing and settlement of equities and derivatives is a very profitable business model. The merged entity will likely be stronger and more profitable than the sum of the parts.”
TSE handled 88 percent of trading of the Topix Index companies in the year through yesterday, compared with 1.6 percent for SBI Japannext and 1.4 percent for Chi-X Japan, according to data compiled by Bloomberg. In the previous year, the Tokyo bourse processed 92 percent of trading in Japan’s benchmark equity index, versus 0.5 percent for SBI Japannext and less than 0.1 percent for Chi-X Japan.
The Tokyo bourse is offering to buy as much as 66.67 percent of Osaka Securities Exchange Co., the world’s No. 3 venue for equity-index futures by number of contracts. Osaka Securities slid 1.1 percent to 435,500 yen as of 10:45 a.m. in Tokyo today.
The merged company, tentatively called the Japan Exchange Group, will operate a cash equity market, a derivatives venue, a regulatory unit and a clearing company, according to the bid document. The deal will result in savings of 7 billion yen ($90.3 million) a year, according to a Nov. 22 statement from the exchange.
Trading in shares of Japan’s biggest companies fell to the lowest level since December 2004 last month, with an average of 1.05 trillion yen in stock changing hands on the TSE’s first section, whose companies have a median market value of 31.3 billion yen, exchange data compiled by Bloomberg show. Shares totaling 966 billion yen have traded on average each day this month.
“The presence of Japan’s market has greatly eroded,” OSE President Michio Yoneda told reporters on Nov. 22 in Tokyo. “We would like to be in full force as a global exchange in the 21st century.”
A merger with Osaka may help the Tokyo bourse recover some of its lost market share from the alternative venues, Masayuki Kato, general manager and chief representative of the TSE in Singapore, said by phone yesterday.
The Topix Index of 1,662 Japanese companies has fallen 20 percent this year and is within 3 percent of the March 2009 low. The country lost its place as the world’s second-largest equity market to China in 2008 and has produced less than 1 percent of global initial public offerings this year.
“Creating more scale locally will fortify their competitive position,” Glenn Lesko, chief executive officer of Instinet in Asia Pacific, said in a telephone interview yesterday. “In cash equities there is precious little precedent for exchanges to move across borders, so I am not sure how this would impact global competition.”
The acquisition isn’t significant to the international market and will only affect people who trade Japanese securities, Hong Kong Exchanges & Clearing Ltd.’s Chief Executive Officer Charles Li told reporters yesterday. Among the exchange acquisitions proposed during the past year, only one deal -- Frankfurt-based Deutsche Boerse AG’s acquisition of New York-based NYSE Euronext -- has been approved by shareholders.
Singapore Exchange Ltd.’s $8.2 billion bid for Australia’s ASX Ltd. in October 2010 was blocked by Canberra regulators. The board of TMX Group Inc., owner of Canada’s Toronto stock exchange, endorsed a takeover by Maple Group Acquisition Corp. on Oct. 31.
TSE’s offer for Osaka, which has its origin in a rice exchange that existed in the 17th century, implies the bourse is worth 129.6 billion yen ($1.68 billion). That ranks the company 15th by market value among publicly traded exchanges around the world, according to data compiled by Bloomberg. Hong Kong Exchanges is the world’s biggest with a market value of $16.7 billion.
“This can be seen, in part, as an attempt to liven up the Japanese market by providing a more concentrated market and one that is multi-asset class,” Neil Katkov, the Tokyo-based head of Asia at financial consulting firm Celent, said in a Nov. 22 telephone interview. “There’s really no way to offset the fundamentals of Japan’s economy, but it’s possible they can help drive some growth through various trading strategies.”
Alternative trading systems make up a small part of Japan’s stock market compared with their share in other regions of the world. Chi-X Europe Ltd., the region’s largest alternative trading system, handles more than 30 percent of the value of FTSE 100 Index stocks, according to the London-based company owned by Instinet and more than a dozen brokers.
“The TSE and OSE are finally coming together, but there’s still a sense they were too slow,” Hiroshi Fujimoto, a fund manager at Tokyo-based Shinkin Asset Management Co, said by telephone on Nov. 22.“They complement each other, but whether they’ll be able to stand up to global competition remains unclear.”
--With assistance from Satoshi Kawano in Tokyo, Kana Nishizawa in Hong Kong and Nick Baker in New York. Editors: Nick Gentle, John McCluskey
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