Big Bang: Nasdaq Japan chief forecasts 'explosion' in trading in 2002
OT, Jay, heard anything about 684, other than trading suspended?
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The Yomiuri Shimbun/Daily Yomiuri - Japan; Jan 30, 2001
There was a feeling of exhilaration when the Nasdaq Japan market was inaugurated on June 19 last year. Nasdaq Japan President and Chief Executive Officer Tatsuyuki Saeki; Masayoshi Son, president of Softbank Corp., which created the new market at the Osaka Securities Exchange with the U.S. National Association of Securities Dealers (NASD); and NASD Chairman Frank Zarb all shook hands for the cameras and triumphantly declared the opening of the Japan version of Nasdaq. But feelings of euphoria rapidly dissipated following the worldwide downturn in stock markets. Nasdaq Japan's trading volume nosedived after peaking in September. The Daily Yomiuri interviewed Saeki, who has repeatedly said that he wants to "change Japan" through Nasdaq Japan, on his strategies for the new year.
Daily Yomiuri: Before Nasdaq Japan, you were with Japan IBM Ltd. for more than 35 years. What do you think of the nation's financial sector as a person who came from a completely different field?
Saeki: I found the sector superdomestic. There is no other sector that detests change so much. So I understand the point made by viewers of a television news show the other day who were asked why Japan lags behind other countries. Thirty-one percent gave the reason that this country's financial markets will never change, a point I understand. Nasdaq Japan and myself are seeking to act as instruments of change.
How do you assess your initial six months? While the number of listed companies during that period was more than that of Mothers (a new market set up for start-up firms at the Tokyo Stock Exchange) it was below what you promised. Trading values at Nasdaq Japan also continue to fall.
I do remember that I said that there would be 50 companies listed on Nasdaq Japan by the end of last year, whereas there were 40 actually. About 10 companies had to postpone their initial public offerings. But I did not force them. I told them to wait as the market conditions were unsuitable.
In September, 12 companies listed and the monthly trading value reached more than 128 billion yen. It was 4.7 billion yen per company on average. We were elated because it was about 11 times more than the TSE's Second Section. I thought my commitment would be fulfilled if this pace continued.
However, the hard times began from October, both here and in the U.S. markets. Total trading value fell. In October, the trading value was 46 billion yen. In November it dropped to 20.3 billion yen and in December it was 23 billion yen.
But trading value per listed company was 1.8 billion yen on average. This is about three times more than the over-the-counter market average, and about four to five times that of the TSE's Second Section. Or about 50 percent more than Mothers. All in all, I rate our efforts at about 80 or 85 out of 100.
Still, some are concerned about the low liquidity of Nasdaq Japan. What do you intend to do about this problem?
One of our key initiatives this year is the introduction of a new trading system that will dramatically increase liquidity in our market. It is a hybrid system, originally developed by the U.S. Nasdaq market, incorporating a market-making pricing system (in which market makers quote prices at which they will buy and sell stocks) into existing order-driven, auction-based transactions for actively traded issues. (The Nasdaq Japan market currently uses an auction system that is used also at the TSE.) On Jan. 10, the U.S. Securities and Exchange Commission approved U.S. Nasdaq's new trading system, called SuperMontage, which mixes market-making and auction systems. We are waiting to get approval from the Financial Services Agency, hopefully sometime in February, and intend to adopt the new system later this year.
What is the difference between the market-making system currently conducted at the over-the-counter market and the one you are going to adopt?
It can do much, much more. I was thrilled when I heard about the practice of what is called best execution. When a market maker receives an order from a customer, they will not execute the order unless they can match it with their own quotes, even when the maker knows that the order could be met by the quotes of other market makers, as it wants to control its own orders. However, under the new system, orders will automatically go to the best quotes on offer, even at rival firms.
The underlying concept of the best- execution system is to establish a fair trading system for investors. At the same time, competition among market makers will intensify. Any market makers that cannot give good quotes will quickly lose customers.
We will also introduce index-linked products such as Nasdaq 100 tracking stock (QQQ) by the end of this year and bring more large-capitalization stocks to the market.
You plan to open the International Section in April, with the start of trading scheduled in June. But the TSE also has a Foreign Section that is currently not very popular.
If we list foreign firms as the TSE did, we will fail. At one stage, 127 firms were listed, but now there are about 40.
We have found a difference of views between foreign firms and the Japanese side. U.S. Nasdaq-listed firms do not find it necessary to raise funds through Nasdaq Japan. So they don't see much incentive in listing here other than selling their brand names. But if foreign firms do list on Nasdaq Japan, we will aim to ensure that their stocks are frequently traded.
Also, most of the foreign firms do not explain in detail to Japanese investors what they are doing after listing. I told them this is unacceptable to Nasdaq Japan. Once I said that, the number of companies who said they would like to be listed rapidly diminished. However, those that still intend to list here are more serious about their obligations.
Which companies will be listed?
I cannot name the firms right now. But they will be major firms with a strong commitment to this country.
Last last year, the TSE decided to accept some English-language documents for listing, making it easier for foreign firms to list. Are you going to follow this trend?
I have always thought and said that English documents should be accepted. Foreign firms have many obstacles to overcome when listing in Japan. The rule that all documents must be written in Japanese has been a burden for them as more expenses are incurred on translation and other costs. So to start with, we will try to minimize the number of Japanese documents required as much as possible, although there are some legal constraints.
Another problem is the high cost of trading foreign firms' shares in Japan. At the moment, it costs 40 dollars to settle one international stock transaction. We are trying to reduce this by one-fourth or one-fifth.
Currently, Japanese securities firms do not sell foreign stocks seriously, as the workload is about 10 times more than that involved in selling domestic shares. They have to look at foreign exchange rates and think about hedging as well as pricing that will be made one day later. But transactions of Nasdaq Japan's foreign stocks will be different. Investors will be able to buy U.S. shares, for example, in yen. And the shares will be traded immediately, rather than the current system that is always one day later.
So we view this year as the year for introducing the new trading system, with 2002 the year for an "explosion" in Nasdaq Japan's trading volumes.@Subhead:What is the hybrid trading system? Daily Yomiuri The hybrid trading system that will be introduced at Nasdaq Japan has two parts:
-- A pure, market-making system under which low-liquidity issues are traded.
-- A hybrid market for actively traded issues, using a combination of market-making and an order-driven, auction-based system.
The existing Nasdaq Japan market uses a pure auction, or order-driven method. However, from late this year, it will introduce a market-making, or quote-driven method. In addition to this market-making system, it will add an auction function for high-liquidity issues.
Meanwhile, the U.S. Nasdaq market currently applies the market-making method from the beginning. Under the new trading system, SuperMontage, the auction method will be mixed, regardless of the liquidity of issues.
This means that in Japan, the hybrid part will be regarded as SuperMontage and the pure, market-making part is the same as the existing U.S. Nasdaq market-making method.
While Nasdaq Japan expects it can adopt the hybrid trading system by late this year, SuperMontage probably will not be introduced at the U.S. Nasdaq until early next year. There are currently 500 to 600 market makers in the U.S. market, making the new system a major system change.
Ginko Kobayashi, Daily Yomiuri Staff Writer
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