Market participants in Tokyo say this week’s announcement by Tokyo Stock Exchange and NYSE Euronext to link their networks is less a practical decision and more a gesture from TSE about how it may proceed in an era of stock-exchange consolidation – an era that seems to have passed the TSE by.
The move has been interpreted as either a step towards a more formal change in ownership, with NYSE Euronext getting a “foot in the door”, or as a means to approach the Asia-Pacific markets from a position of strength – or both.
What the deal is likely not to lead to: any notable difference in market cap or flows.
The announcement has been labelled “noise”, “a gesture” and a “publicity stunt” by Tokyo-based traders.
They are not dismissive of the exchange’s efforts to bolster its presence, but say linking the platforms of two exchanges by itself won’t make a difference. What counts is the signalling of TSE’s intention to become a more active and dynamic player beyond Japanese shores.
A TSE spokesman says, however, that the exchange is deliberately limiting its alliance with NYSE Euronext to just technology. Its trading platform, Arrowhead, is regarded as the best in the region (for now), and it wants to at least see if it can be integrated with NYSE Euronext’s electronic equities trading platform (known as Safety).
The spokesman acknowledges that actual placement of orders between Tokyo and New York is remote. That would almost surely still require a local broker-dealer. But testing and expanding the IT infrastructure is a necessary first step, he says. The TSE hopes this could also benefit investors, by giving them much faster information on the other market’s exchange, even if it does not allow them to place orders directly.
The lack of detail in the announcement with regard to what the linkage would mean is not due to a lack of imagination. Indeed, market participants say the TSE is engaged in many discussions about how it could leverage its New York alliance, while NYSE Euronext is keen to get a toehold in Asia.
“[The TSE is] talking to us and our clients about how they could leverage this link,” says one foreign equities broker.
The track record for such arrangements isn’t impressive. Singapore Exchange and the Australian Securities Exchange have had such a link for years, and it goes unused. Retail investors aren’t interested and institutional investors already have the infrastructure to trade in the local market.
“The only way these tie-ups work is when it involves a full-blown takeover,” says one equities trader in Tokyo, adding this partly explains SGX’s desire to acquire ASX. “NYSE Euronext works, because it was a takeover,” he adds. “What the TSE is trying to do with this announcement is to look relevant.”
The TSE is well aware of this. The spokesman at the exchange says TSE is not trying to recreate the SGX/ASX link to no purpose. It is trying instead to improve and internationalise its infrastructure, and then see what can be achieved. He notes that a proposed link among Southeast Asian countries hasn’t amounted to much in part because those exchanges don’t possess very good electronic platforms.
This could open the door to a closer alignment with NYSE Euronext, but the TSE is one of the few remaining stock exchanges that has not demutualised. Traders in Tokyo say they cannot believe the Japanese government would ever consider allowing a foreigner to take control of the TSE. The TSE itself says its workings with NYSE Euronext are purely about technology and have nothing to do with ownership structures.
The deal could also be a genuine effort to boost liquidity in the Japanese market. “Exchanges are always dreaming up ways to grow their business,” notes a trader. The two obvious ways are to list more products, and to internationalize.
Trading non-Japanese products is not out of the question. SGX is a rare example of an exchange getting this right, given its liquid market for American depository receipts, Chinese stocks and Nikkei futures contracts. This was not done via any alliance, but by SGX investing in the necessary clearing and settlement infrastructure for these securities.
Traders in Tokyo believe that by cozying up with NYSE Euronext, TSE is looking to Asia as much as it is trying to keep up with consolidation in North America and Europe.
“The TSE has been ostracised from Asian exchange M&A discussions,” says Hiroshi Matsubara, marketing director at Fidessa Japan. “They must do something. Sharing their network with New York can help them.”
The TSE spokesman agrees this is part of the thinking. “We are not out to conquer the world. We are trying to develop a sophisticated system that would allow us [with NYSE Euronext] to develop something with Asia.”
The exchange has watched as its size has remained roughly the same over the past decade while the rest of Asia has expanded. For example, in 2000, the market capitalisation of the TSE and Osaka Stock Exchange was about $3.1 trillion, versus a combined market cap of $1.2 trillion for Hong Kong, Shanghai, Shenzhen and Taipei.
Today, the Japanese market cap is around $3.3 trillion – and the four bourses of Greater China together make up around $6.5 trillion.
Tokyo has also been on the sidelines as Singapore’s exchange (in which TSE is a minority shareholder) makes aggressive moves such as its joint venture with Chi-East and its ongoing effort to acquire ASX.
“Tokyo wants to be competitive in Asia,” says a trader. Its executives have learned that in this newer, more competitive world, the exchange has to be flexible and innovative, and behind the scenes it is engaged with other exchanges and governments in Asia.
But because Japan has become marginalised in the region, TSE believes it needs to negotiate with the likes of Hong Kong or a future SGX/ASX group with the backing of NYSE Euronext. Otherwise it may not have much leverage.
The TSE has attempted to extend its presence through the concept of ‘remote membership’, but so far only Hong Kong allows its investor base to use local brokers using offshore membership. US regulators are not keen on the idea as they view it as outsourcing their responsibility to protect American investors. So it is not clear whether a shared platform will do anything to promote this particular strategy.
The upshot is that, for reasons including regulation, tax and business culture, there is no quick fix for the TSE. It has ambitions to once again be the leading exchange in Asia but it has found itself on the outskirts of the region.
It is too big to countenance being acquired, but not big enough to grow on its own. Its alliance with New York, which formally dates to 2007, is its best means of internationalising and gaining the clout it needs to approach the likes of Hong Kong or Singapore with confidence. Yet NYSE Euronext has no tangible presence in Asia-Pacific.
The TSE seems to be aiming to build with NYSE Euronext a platform that is best of breed, but has yet to hit on a strategy for how to get more investors to use it.