TSE under pressure from global consolidation

by and

Kyodo News

The Tokyo Stock Exchange has been saying for some time that investors and listed companies could be the biggest winners in a global realignment of the world’s major stock exchanges, a shakeup that has been gathering pace, as seen in the TSE’s tieup talks with bourses in New York and London.

While that may be true, fear of being left behind as it struggles to hold its position as one of the world’s top financial markets, rather than concern for companies or their shareholders, appears to be spurring the TSE’s search for partners.

Collaborating with other major bourses “would generate benefits for investors and listed companies.” This is the refrain from TSE President Taizo Nishimuro at news conferences and elsewhere.

Nishimuro acknowledges the TSE, the world’s second-largest bourse by market capitalization after the New York Stock Exchange, has been in discussions with the NYSE for a possible capital alliance, including cross-holding of each other’s shares after the TSE’s planned listing in 2009.

The TSE has also been in negotiations with the London Stock Exchange about a potential operational alliance involving development of a common stock trading system and cross-listing of exchange-traded funds on the two markets.

The Tokyo market is also looking into deals with bourses in China, South Korea, India and other Asian countries.

Eisuke Nagatomo, the TSE’s managing director and chief regulatory officer, said the exchange hopes to “become a core market that handles the flow of funds in Asia.”

Some TSE officials admit these moves reflect worries that unless it acts quickly to offer more financial products and services, Tokyo could lose its position as one of the world’s most important financial centers.

“We need to establish a position that people cannot ignore no matter what happens in the world,” said a senior TSE official who asked not to be named.

A global shakeup among major stock exchanges has been under way for a while. NYSE Group Inc., which runs the NYSE, and Euronext N.V., the operator of stock exchanges in Amsterdam, Brussels and Paris, agreed to a merger in June.

The NYSE’s main rival, Nasdaq Stock Market Inc., bought a large stake in London Stock Exchange Group PLC earlier this year, while Chicago Mercantile Exchange Holdings Inc. and its crosstown rival, CBOT Holdings Inc., announced they had agreed in October to a merger.

The TSE was left out of that round of matchmaking, giving its executives the feeling they have “started late,” the official said.

Nishimuro has stressed that the TSE doesn’t want to limit itself to an alliance with the NYSE, saying “everything is possible.” He has also said that even if a TSE-NYSE alliance emerges, the partnership would “not be exclusive.”

For its part, the NYSE does not seem to be rushing to tie the knot with its counterpart in Tokyo, preferring to focus on completing its merger with Euronext.

“It’s hard not to be impressed by the progress and position of the TSE (in Asia),” said Richard Ketchum, chief executive officer of NYSE Regulation Inc., the New York exchange’s in-house regulator.

But Ketchum suggested any alliance between Tokyo and New York wouldn’t happen before the TSE goes public by turning itself into a holding company system in 2009.

“I think the first step is for the Tokyo Stock Exchange to get into the structure that it needs to be effective in Japan,” he said.

Experts point out that the TSE cannot prosper in a global realignment simply by seeking partners in Asia.

Another senior TSE official echoed that view and said it would be almost impossible for the bourse to completely integrate its Asian neighbors because of their “strong nationalism.”

The TSE will have to begin by establishing relatively loose partnerships with many other bourses covering a wide range of issues, the official said.

The TSE’s unprecedented trading shutdown earlier this year due to turmoil from the raid on Livedoor Co., and a huge “fat finger” blunder involving J-Com stock that was caused partly by a TSE software glitch that refused cancellation attempts by Mizuo Securities Co. have soiled the TSE’s reputation. Individual investors lost trust in the bourse and the botched trade led to a 40.4 billion yen compensation demand, a lawsuit and the resignation of then TSE President Takuo Tsurushima.