Following approval by shareholders on Nov. 20, Tokyo Stock Exchanges Group and Osaka Securities Exchange will merge on Jan. 1 and the Japan Exchange Group will become the holding company for the two exchanges. The newly created entity will rank fourth in the world in size, following the London Stock Exchange, and the aggregate value of shares of the businesses listed in the Tokyo and Osaka exchanges as of October make it the largest in Asia.
The new entity will likely have a difficult time as Japan’s stock exchanges are facing very tough competition from overseas stock exchanges. Nonetheless, it is hoped that it will help to reinvigorate business activities in Japan and resuscitate the sluggish economy by enabling businesses to raise funds through stocks with ease.
TSE controls more than 90 percent of spot stock transactions in Japan, while OSE dominates trading of financial derivatives. Spot stock trading on the two exchanges will take place solely in Tokyo by July 2013, while the markets for financial derivatives will be concentrated in Osaka by March 2014.
As the needs of investors grow more diverse and sophisticated, progress continues in information and communications technologies, and deregulation accelerates, stock exchanges are increasingly competing with each other by installing advanced computer systems. By taking advantage of the merger, the Japan Exchange Group should be able to improve its computerized transaction systems so that it will be attractive to investors not only in Japan but also overseas.
Progress in information and communication technologies has drastically shortened the time it takes to trade stocks. In January 2010, TSE introduced a high-speed transaction system that reduced the time from 2 to 3 seconds to 2 milliseconds. But the London Stock Exchange and Singapore Exchange have introduced systems that have reduced trading time to 0.125 milliseconds and 0.074 milliseconds, respectively. It is said that high-frequency trading, in which profits are sought by quickly repeating transaction orders through computers, accounts for about 60 percent of stock transactions in the United States and Europe.
In addition to keeping pace with this trend, the Japan Exchange Group must also try to meet the needs of investors and securities firms that do not rely on high-frequency trading. It must also make utmost efforts to prevent computer problems, which would drive investors to overseas exchanges. Finally, the Japan Exchange Group must remain vigilant against irregularities such as insider trading. The new exchange and securities industry have a duty to maintain the trust of corporate Japan.