(Sept 19): Japanese equities may become more volatile after the Tokyo Stock Exchange (TSE) extends its trading hours in November, with the risk that investors might be scared off as it comes on the heels of last month’s market crash.
The Japanese bourse will increase the equities trading hours by 30 minutes beginning Nov 5, pushing back the cash market’s close to 3.30pm and lengthening the daily session to 5 1/2 hours. The exchange will also introduce a closing auction session to accommodate the increased trading volumes at the end of the day.
While exchange officials insist longer trading hours may increase trading volumes, market players say that just keeping the shop open for longer wouldn’t necessarily result in more customers. On the contrary, traders fret that markets may become less liquid and more volatile if the same volume is spread over longer hours.
The experience of South Korea, which extended trading hours in 2016, shows that doing so does not necessarily lead to higher volumes, said Naoki Hoshi, head of electronic trading at UBS Securities Japan.
The TSE’s 2011 decision to cut the midday recess by 30 minutes didn’t translate into higher trading volumes.
Intraday trading could also become less liquid if investors shift some of their orders to the newly created closing auction session from the continuous intraday trading session.
The TSE currently holds a daily auction right after trading ends at 3pm, but under the new system, there will be a five-minute auction session just before close which would allow traders to place their orders, a move aimed at improving price transparency.
“At the moment, most orders for closing comes after 14:59 so the order book for closing is not clear,” said Masatsugu Takiyama, senior trader at Mitsubishi UFJ Trust & Banking Corp. “With the closing auction session, we should be able to grasp the demand-supply balance earlier.”
The new plan has prompted several Japanese asset management firms, which are currently not participating, to consider joining the closing auction.
Tomomi Yokoyama, trader at Daiwa Asset Management, whose firm is considering taking part in closing auction said trading volume at close will increase, but noted there are concerns about the possible decline in intraday liquidity.
Closing prices have gained significance over the years as passive fund managers pushed through their deals at the day’s end in a bid to match their performance with the market.
But some are concerned that even closing auction could become more choppy because the TSE has not adopted anti-gaming measures that are common at major exchanges, such as non-cancellation period and random closing period.
For instance, in Hong Kong, there is a two-minute non-cancellation period, which is followed by two-minute random closing period. In contrast, the TSE is going softer with a one-minute enhanced monitoring period at the end of closing auction session.
Daiwa Asset’s Yokoyama said that sudden cancellation of large orders at the last moment could wreak havoc and that the absence of a non-cancellation period was worrisome.
Still, firms like UBS take comfort from Japan’s modest price volatility at market close, the lowest in the region, thanks in part to the large presence of index arbitrage players.
They are “price corrective in nature and are a source of additional liquidity”, said Taichi Baba, head of program trading at UBS Securities Japan, adding the adoption of random close could backfire by jeopardising liquidity provided by these players.
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