Japan’s biggest commodity exchange hopes to regain its lead over its London rival by transforming its operations to appeal to hedge funds and other big international traders.
Moves by the Tokyo Commodity Exchange included a much better trading system, the launch of several new futures contracts and a wholesale change in trading rules, executives told the Financial Times.
They said that, if Tocom succeeded, it could regain its lead over the London Metal Exchange to again become the world’s second-largest commodities bourse, smaller only than New York’s Nymex.
But Tocom is also fighting for survival since the government is considering a proposal to merge it into a super-bourse dominated by the Tokyo Stock Exchange.
Tocom is racing against time.
Core to its plans is the trading system. Exchange officials say that, unlike the present seven-year-old system, the new one will have the capacity to cope with algorithmic trading that is based on computer models and widely used by hedge funds and other institutional investors.
Toshifumi Hirai, president and chief operating officer, and Mitsuhiro Onosato,executive director of planning and public relations, admitted that the present system was “old-fashioned”. But deciding on the “details” might take a further year. The system would then have to be built.
It is not clear that the exchange can hold out for this long.
It emerged last month that the Council for Economic and Fiscal Policy – the government’s main policymaking body – had hatched the idea of merger between Tocom, the Tokyo Grain Exchange, the Tokyo Financial Exchange andthe TSE.
The council argued that the first three exchanges had out-of-date trading systems and operations.
Mr Onosato said it was “impossible” for the government “to compel” Tocom to merge as it was “an independent organisation”.
But in a country where the government has a history of imposing mergers on poorly performing entities, the Council’s recommendations carry weight.
Tocom also aims to transform trading in its range of commodities contracts, which include gold, rubber, platinum and kerosene, by introducing a series of “mini-futures”.
It hopes smaller contract sizes will bring back retail investors, whose waning interest triggered a decline in volume.
After peaking at 87m in 2003, contract volume dropped 29 per cent in two years.
It rose only 3 per cent last year to 64m, despite a trading boom on rival exchanges.
The introduction of mini-futures will allow Tocom to devise trading rules for the existing, larger futures contracts that are more suited to big institutional investors and more in line with Tocom’s rivals’.
These include a doubling of the various limits on maximum daily price movements in its contracts.
Tocom will first test the waters by introducing gold mini-futures within the next two months.
Tocom is also considering a range of new futures, based on CO2 emissions rights, a commodity index and liquefied petroleum gas.