15th ASF Tokyo Round Table Current Status of Off- Exchange ...masd.mn/wp-content/uploads/15th_ASF_Tokyo... · exchange market where the issue in question is listed or registered

© Japan Securities Dealers Association. All Rights Reserved.

Current Status of Off-Exchange Trading

September 2, 2019

Yuka Shimizu

Assistant Manager

Equity Market Division

Japan Securities Dealers Association

15th ASF Tokyo Round Table

© Japan Securities Dealers Association.All Rights Reserved.

Contents

1. Development of Major of Legal Frameworks.…..……………………… 2

2. Operations relating to Off-Exchange Trading….………………… 3

3. Overview of Off-Exchange Trading..……………………………… 4

4. Proprietary Trading System (PTS) Operations

(1) Outline of PTS Operations …………………………………………… 5

(2) PTS Pricing Methods…………………………………………………… 6

(3) Securities Companies operating PTS…………………………………… 7

(4) Quantitative Limitation of PTS………………………………………… 8

(Topics)

①Recent Discussions on PTS Margin Transactions………………… 9

②PTS Margin Transactions Scheme……………………………………… 10

5. JSDA’s Self-regulatory Rules …………………………………………… 12

（Ref.） JSDA’s Website…………………………………………………… 13

1


1. Development of Major Legal Frameworks

Dec. 1998 Amendment of Securities and Exchange Law (Financial System Reform Law) Liberalization of Off-exchange trading, etc. Liberalization of PTS (Pricing method shall be “Order Matching Method” and “Quote

Driven Method”) ⇒ JSDA started to disseminate price information, etc. relating to trading etc. conducted

outside financial instruments market exchanges.

Nov. 2000 FSA “Guiding Principles for Opening, etc. of Proprietary Trading System (PTS)” “Market Price Trading Method” and “Direct Negotiation Method” were added to the PTS

pricing methods. Best quotation, trading price, etc. were required to be disseminated on real-time basis and

in comparable way among PTSs.⇒ JSDA established and operated mechanism for conducting the above external

dissemination.

Apr. 2005 Amendment of Securities and Exchange Law Introduction of duty for best execution “Auction method” was added to the PTS pricing method.

Sep. 2007 Enforcement of Financial Instruments and Exchange Act “Guiding Principles for Opening, etc. of Proprietary Trading System (PTS)” were

rearranged and integrated into the current “Comprehensive Guidelines for Supervisory of Financial Instruments Business Operators, etc.”

Oct. 2012 Deregulation of Take-Over Bid Regulation Applicable for PTSs “5% Rule” shall be exempt for the PTSs satisfying a certain requirement

Nov. 2013 Comprehensive Review of Regulation on Short-Selling The same short selling regulation applying to exchanges to be implemented to certain PTSs

Sep.2019 Ban of PTS Margin Transactions lifted

2


2. Operations Relating to Off-Exchange Trading

In Japan, stocks that are listed on financial instruments exchanges can be traded both on-exchange and

off-exchange.

Regarding off-exchange transactions of listed stocks, etc. by securities companies (financial

instruments business operators), the following regulations are imposed on securities companies and

the Japan Securities Dealers Association (JSDA) under the Financial Instruments and Exchange Act and

related rules to enable the provision of price information to market participants.

1. A securities company must report information on any trading executed outside the financial

instrument market (off exchange) (referred hereinafter as “executed trade information”) within five

minutes to the JSDA.

2. A securities company must also report information on offerings made to a large number of investors

simultaneously outside the financial instruments exchange market (referred to hereinafter as “quote

information”) within the same time frame.

3. The JSDA receives reports on the executed trade information and quote information mentioned in (1)

above, and notifies other securities companies and announces the information on a real-time basis

based on such reports.

4. The JSDA must report and announce the daily trading amounts and highest, lowest and closing prices

for each issue traded outside the financial instruments exchange market, and inform the prime

minister.

33


2,252,387 2,092,294

2,553,421

3,572,861

5,347,742

7,256,882

7,951,186

6,054,098

3,902,246 3,754,677

3,627,653

3,229,946

7,040,482

6,432,745

7,461,773

6,912,539

7,417,401

0.02% 0.07% 0.04% 0.03% 0.04% 0.10% 0.25% 0.35% 0.77%0.84%

3.55%

5.52%5.97% 5.78%

5.10%4.73% 4.58%

8.86%

7.63%

6.24%5.92%

5.11%

5.47%

6.36%7.03%

6.11% 6.03%

8.50%

10.16%9.70%

10.28%

11.91%

11.30%

15.38%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

On-exchange Trading (C)

Share of PTS over On-Exchange

(A/C)

Share of Off-Exchange(Except for

the PTS) over On-Exchange (B/C)

3. Overview of Off-Exchange Trading

Amount of Trading Outside Financial Instruments Exchanges

(Note) Data on “On-Exchange Trading” is compiled in reference to TSE Monthly Report

(Trading Amount：JPY 100 million) (Share：%)

(405) (1,568) (1,016) (1,160) (2,279) (7,247) (19,521) (21,487) (29,928) (31,356) (128,719)(178,321)(420,478)(371,864)(380,872)(327,131)(339,467)

199,649159,720159,389

211,498273,024

396,858505,945

425,656238,438

226,413308,407

328,139

683,072661,225888,488781,399

1,140,946

Entire Off-Exchange Trading

(B)

4


4. PTS Operations

What do the operations of a Proprietary Trading System (PTS) consist of ? They consist of the “sale and purchase of securities or intermediation thereof, or brokerage or

agency”, and

“a system that effects securities transactions with or between its participants in accordance with a

prescribed pricing method or other method similar thereto by offering a large number of

participants simultaneous access to the system using electronic information processing technology”.

⇒ While a PTS has trading infrastructure similar to that of a financial instruments exchange, its

trading methods and volume of trades are restricted to a limited range, which results in its

system operator being deemed a financial instruments business operator and licensed as such.

Securities companies operating PTSs (see details in slide 7) for listed stocks, etc. are

required; To be subject to the Financial Instruments and Exchange Act and JSDA’s rules, as members

conducting off-exchange trading, and

To disseminate best quotes, trading prices, etc. on a real-time basis and in a manner conductive to

comparison with relevant information by other PTSs.

⇒ Through the reporting and dissemination system of off-exchange trading, etc. established and

operated by JSDA, real-time basis reporting shall be conducted for the quotes and trading

information.

5

(1) Outline of PTS Operations

5


Process

Normal

exchange

Transactions

PTSs

Dark

Pools

＜Ref.＞PTSs and Dark Pools

6

Investors Securities firms Exchange

Order

Securities Firms (PTS Operator)

Order

Order

Matched & Contracted

Securities firmsExchange

(Off-auction market)

Order

Order

Matched

Investors

Investors

Contracted

Cross orders

Brokerage

In other countries, “dark pools” often mean off-exchange transactions in which orders are matched and executed

within these dark pools (private financial forum).

In Japan, dark pools refer to transactions exempted from PTS regulations, in which orders are matched in dark pools

but executed via the off-auction market of the TSE (i.e. exchange transactions).


(2) PTS Pricing Methods

Outline Starting

Order

Matching

Method

This method means when a limit order price submitted by a customer matches the

buy order of a counterparty, the trade is done at the said price.

This method is operative only for the matching of limit order prices submitted by

customers without adopting the market order or itayose method (major difference

from trading on exchanges).

Dec. 1998

Quote Driven

Method

The so-called market making method.

A securities company (market maker) quotes multiple bids and ask prices for an

issue, and trading is based on these prices.

Dec. 1998

Market Price

Trading

Method

This is a trading method that uses the trading price (*) on the financial instruments

exchange market where the issue in question is listed or registered.

* For example, the closing price or VWAP (Value Weighted Average Price) on

the financial instruments exchange markets

Nov. 2000

Direct

Negotiation

Method

The conditions of price, volume, etc., are negotiated between customers, and the

trade is executed using the conditions agreed on by both parties (*).

* This method is oriented toward large lot trading. PTS is deemed to play the

role of offering a ground where customers can negotiate and trade.

Nov. 2000

Auction

Method

This trading method enables a trading by auction method similar to the financial

instruments exchange and itayose and market orders are available.

However, this method is subject to volume limitations which don’t apply for other

methods.

Apr. 2005

77


(3) Securities Companies Operating PTSs

Company Name Started PTS Pricing MethodTransaction

TimeTarget Customer Remarks

SBI Japan Next Securities (First Market: J-Market)

Aug.20, 2007 Order Matching Method

8:20～16:00 19:00～23:59

Securities Companies - Continuous Matching of Limited Orders - In principle, benchmark price and price range

being set up similarly to those of exchange- Tick size is 1/10

thof that of exchange

SBI Japan Next Securities (Second Market: X-Market)

July 2, 2012 Order Matching Method

8:20～16:00 On-line Securities Companies

(Individual investors)

- Continuous Matching of Limited Orders- In principle, benchmark price, price range, and

tick size being set up similarly to those of exchange

SBI Japan Next Securities (Third Market: U-Market)

May 2, 2015 Order Matching Method

8:20～16:00 Institutional Investors(e.g., Investment

banks)

- Continuous Matching of Limited Orders - In principle, benchmark price and price range

being set up similarly to those of exchange- Tick size varies in line with the price change

SBI Japan Next Securities (JNX Cross) (Suspended)

Apr. 22, 2013 Market Price Trading Method

8:00～17:00 Securities companies - Provide crossing (Matching with exchanges’ whole day VWAP)

Chi-X Japan(Chi-X PTS)

July 29, 2010 Order Matching Method

8:00～16:00 Securities companies, Institutional investors

- Continuous Matching of Limited Orders- In principle, benchmark price and price range


Chi-X Japan(Chi-Match)

Sept. 1, 2014 Market Price Trading Method


- Provide crossing (Corresponding with exchanges’ whole day VWAP, morning session VWAP and afternoon session VWAP calculated by Chi-X based on the trading data in exchange )

Chi-X Japan(Chi-Select)

June. 8, 2015 Market Price Trading Method


- Continuous Matching of Limited Orders- In principle, benchmark price and price range


8

[PTS Operating Companies: 2, but 7 in terms of number of PTSs]


(4) Quantitative Limitation of PTSs

The trading size of PTSs operated by securities companies that do not have an SRO function has expanded beyond a certain limit.⇒ Creating potential for increased risk in terms of ensuring fair trading.

Introduction of quantitative limitation based on the share of trading

9

Outline of Thresholds Outline of Requirement

Method ofAuction

Daily trading volume of PTS against the daily average turnover over the past six months of all exchanges combined

Exceeds 10% (for any individual issue), and

Exceeds 1% for all listed securities

Required to obtain a license to open financial instrument market (exchange license)

Methods other than Auction Method

Daily trading value of PTS against the daily average trading value over the past six months of all exchanges combined

[First Step] Is larger than 10% (for any individual

issue), and Is larger than 5% of the aggregated

value of the listed stocks and the bonds with share options

The following measures shall be taken;Expansion and rearrangement of trading control and

examination system (organization, personnel) to ensure fair trading

Establishment of reserve money for loss caused by the failure of fulfilling contract similar to the financial instruments exchange to ensure certainty of settlement.

Regular implementation of sufficient checking to ensure the safety and certainty of system capacity, etc.

[Second Step] Is larger than 20% (for any individual

issue), and Is larger than 10% of the aggregated

value of the listed stocks and the bonds with share options

Required to obtain a license to open financial instrument market (exchange license)

9


[Topic]① Recent discussions on PTSs

Reasons for prohibition of Margin transaction on PTSs as suggested by the JFSA

1. If a securities firm that operates a PTS provides money or share certificates to its customers, the possibility

of conflicts of interest arises because it is the market operator’s role to enforce regulatory measures such as

limiting or prohibiting margin transactions.

2. It is unrealistic to expect securities firms that operate a PTS to exercise self-regulatory functions at the same

level as exchanges.

In December 2016, the Report by the Working Group on Financial Markets under the Financial

System Council* recommended the following regarding PTS:

Assuming the above concerns (reasons for prohibition) are resolved, permitting margin

transactions on PTSs can be considered.* This was a report by a working group established under the organization which researches and deliberates important matters for domestic

finance such as financial system reviews, in response to the Finance Minister’s consultation. The report is posted on the website of the

JFSA.

Discussions between Stakeholders (February 2017~June 2018)

• Feb 2017: The Study Group on PTS Margin Transactions is established, and discussions begin regarding margin transactions on PTSs• The Study Group is composed of securities firms that operate PTSs and other securities firms, securities finance companies, exchanges, and the

JSDA

10

July 2019 Handling of PTS Margin Transactions is permitted

Expected Effects of Lifting Ban on PTS Margin Transactions

Better pricing can improve convenience for retail investors, who are the main users of margin transactions.

→Further improve efficiency and enhance function of the entire market system through inter-market competition

© Japan Securities Dealers Association. All Rights Reserved. 11

Idea behind the PTS Margin Transaction scheme

Aim to have the same systems and frameworks as margin transactions conducted on the

exchanges

Create a scheme that is easy to understand and to use for investors and securities firms

Create a scheme that considers the convenience for investors and securities firms of the

existent standardized margin transactions (including loan transactions)

Overview of the scheme

Securities firms eligible to handle PTS margin transactions must be trading participants of

TSE.

Transactions will be categorized into standardized margin transactions and negotiable

transactions, as is the case with margin transactions at TSE.

Loan transactions will be allowed.

Trading hours are set to be the same as the trading session hours of TSE（9:00-11:30, 12:30-

15:00）

Settlement in other markets is allowed (no constraints on settlement in TSE and PTS)

[Topic]② PTS Margin Transaction Scheme

© Japan Securities Dealers Association. All Rights Reserved.

[Topic]② PTS Margin Transaction Scheme (Conceptual Diagram)

12

Bidding for premium ※(Adding up premium charges for transactions in TSE and PTSs)

Major shareholders, institutional investors, etc.

* The rate of the premium is set as the same level for transactions in

the TSE and PTSs.

Standardized margin transactions at Tokyo Stock Exchange (TSE)

and PTS (by smart order routing (SOR) or market designation by

customers)

Negotiable margin transactions

(by smart order routing (SOR) or market designation

by customers)

Securities Firms Securities Firms

TSE CXJ JNX TSE CXJ JNX

Japan Securities Finance (JSF)

Financing for loan funds

Procuring shortfall of stocks, etc.

Funds, stocks, etc. are procured by

securities firms themselves

Applying for loan transactions by the market

※ CXJ: Chi-X Japan, JNX: SBI Japannext

(Reference)

Japan Exchange Group

“Margin trading”

https://www.jpx.co.jp/english/equities/trading/margin/index.html

Japan Securities Finance Co., Ltd.

“Loans for Margin Transactions”

http://www.taisyaku.jp/english/


5. JSDA Self-Regulatory Rules

[Major points of regulation]

Securities firms are required to report executed trade information and quote

information

When necessary, the JSDA implements suspension of off-exchange trading by

securities firms during exchange trading hours

Securities firms are obligated to set up appropriate management and response

mechanisms for suspensions of off-exchange trading

1. Ensuring that systems can confirm matters such as whether there is suspension of

trading on exchanges, information that may have a large impact on investor decision-

making, and suspension of trading on PTSs

2. Ensuring that systems can deal with suspensions of off-exchange trading for

transactions occurring outside exchange trading hours

<Remarks>

There are no price limitations.

The JSDA confirms appropriateness of trading prices as a method of managing trading.

Securities companies are required to check appropriateness of trading prices and keep a

record of confirmation.

1313


(Ref.) JSDA’s Website

14


(Ref.) JSDA’s Website （Related to Off-Exchange Trading)

15



(Related to PTS Trading)

16


(Ref.) JSDA’s Website (Related to PTS Trading)

17



18


(Ref.) Related URLs of JSDA’s Website

JSDA’s Website (in Japanese)

http://www.jsda.or.jp/

JSDA’s Website (in English)

http://www.jsda.or.jp/en/

Website related to Off-Exchange Trading, Etc.

http://info.offexchange2.jp/

Website related to PTS Trading, Etc.

http://pts.offexchange2.jp/

19

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15th ASF Tokyo Round Table Current Status of Off- Exchange ...masd.mn/wp-content/uploads/15th_ASF_Tokyo... · exchange market where the issue in question is listed or registered