Listen to this article

00:00
00:00

A short drive away from the Osaka Securities Exchange along the banks of the Dojima River is the site of the world’s first derivatives exchange, where Japanese merchants started trading rice futures back in 1730.

The Dojima Rice Exchange is now marked by a tiny plot of land with a stone engraving and a sculpture of two children with a sheaf of rice, a monument most walk past without so much as a glance.

In today’s global market, Osaka has also paled in significance since its heyday. However, Michio Yoneda, the OSE’s president, is preparing for battle to regain its position in the top-10 derivatives markets.

The OSE has struggled to regain its presence in derivatives trading after regulations introduced in the early 1990s meant it lost its position as the world’s third-largest futures exchange by turnover, as trading of Nikkei futures shifted to Singapore and the asset bubble burst.

It is still Japan’s largest derivatives market but languishes at 15th in the world, trailing emerging markets such as China’s Dalian and Zhengzhou Commodities Exchanges.

Whether it can climb back up the rankings depends partly on the introduction of its new trading platform early next year.

Developed by Nasdaq OMX, the new platform will reduce the time it takes for a trade to be completed from 60 milliseconds now to less than 10 milliseconds enabling it to compete with the Singapore exchange and other global markets.

The OSE already offers a co-location service, where its members can place their servers close to the OSE’s matching engine.

However, another key development for traders is that the OSE will move its matching engine from Osaka to the Tokyo metropolitan area, where the vast majority of its clients are based. Transmission between the two cities adds a further 20 milliseconds.

“That [the 20 milliseconds] is a lot of time,” says Mr Yoneda. “In the past it wasn’t, but now it makes a big difference.” With the new platform, the OSE will be able to introduce more products, more quickly.

A current lack of remote members is one of the obstacles to the OSE derivatives market’s growth. High tax rates plus regulations stipulating that remote members must have a board of directors has put off overseas proprietary trading houses.

Instead such investors have to trade through member brokers, which increases their costs.

The OSE will decide by the summer whether or not to alter its fee structure to cut costs for remote members, says Kotaro Yamazawa, a director at the exchange.

The OSE is not only about derivatives trading. It also owns Japan’s largest market for small and medium-sized companies, thanks to its purchase last year of the Jasdaq start-up market. Later this year it will merge Jasdaq with its own Hercules market.

Japanese start-up markets have suffered from a considerable lack of investor confidence since internet start-up Livedoor was delisted from the Tokyo Stock Exchange’s “Mothers” market in 2006 following the arrest of its founder amid charges of accounting fraud and market manipulation.

Since then, the Japanese version of Sarbanes-Oxley regulations, known as J-Sox, have been brought in, which some regard as tough for small companies to meet.

A combination of these two problems and lacklustre domestic economic growth over the past few years has led to a sharp decline in the number of new company listings. The market is dominated by retail investors and has a lack of liquidity that leaves many stocks subject to volatile movements.

A lack of venture capital in Japan also means that many companies are small when they list, which can limit the number of investors and makes subsequent fund-raising more difficult.

All this gives Mr Yoneda another significant challenge in his attempt to increase the competitive edge of the OSE. Those plans include expanding the number of analyst reports on the companies listed on his newly merged Jasdaq market from about 20 per cent of the merged market’s listed companies.

“We have a three-year space [to make improvements to the market],” Mr Yoneda says. “The start-up markets need to be brought out of their fractured state and improve quality.”

Mr Yoneda also plans to introduce a new Jasdaq index and, subsequently, futures and options derivatives to expand hedging and trading opportunities.

The OSE may also provide investor relations services to companies listed on its market to help guide them after listing. These services would include helping them with translating financial statements into English to appeal to foreign investors.

More sweeping changes are also in prospect. “The landscape of exchanges in Japan is going to change,” says Mr Yamazawa. “There will be more alliances and mergers.”

Copyright The Financial Times Limited 2017. All rights reserved.
myFT

Follow the topics mentioned in this article

Comments have not been enabled for this article.