Capital market trends in Japan: The birth of a new exchange

Understanding the evolution of best execution and accompanying changes in market structure is essential to any discussion of the current trading environment. Meanwhile, the transformation of exchanges and the pressure from investors seeking best execution have put enormous demands on trading technology. Best execution regulations were introduced in Japan under the amended Securities and Exchange Act (the current Financial Instruments and Exchange Law) in April 2005; however, these new rules are much less detailed and stringent compared to the explicitly specified codes of conduct mandated in Europe and North America. Moreover, with precise definitions of ‘best execution’ left to the discretion of securities firms — the operators themselves — there is scant likelihood of regulations being implemented and standardised on a market-wide basis. By the same token, Japan has yet to witness the dynamic structural market changes and segmentation seen in Europe and North America. This paper examines Japan’s securities market trends based on the acute changes that have taken place in Europe and North America, reviewing the changing environment of the world’s securities exchanges, business opportunities and strategic choices, then delving into the history and current state of Tokyo Stock Exchange’s arrowhead initiative, before concluding with a recap of the events leading to the Japan Exchange Group (JPX) merger. Celent regards competition and diversity as the wellsprings of innovation, and technology as the catalyst for innovation. From this vantage point, Celent is eager to see incremental improvements, but also some disruptive innovation, in Japan’s capital market.