Japanese equities may face increased volatility following the Tokyo Stock Exchange’s (TSE) decision to extend trading hours starting November 5. The TSE will push back the cash market’s close to 3:30 p.m., extending the daily trading session to 5 1/2 hours. Additionally, a new closing auction session will be introduced to handle the anticipated increase in trading volumes at the end of the day. This move comes in the wake of last month’s market crash, raising concerns among investors about potential market disruptions.
Potential Benefits and Risks
While TSE officials believe that longer trading hours could lead to increased trading volumes, market participants express skepticism. They argue that extending hours might not attract more investors but could instead spread existing volume over a longer period, potentially leading to decreased liquidity and heightened volatility. Naoki Hoshi, head of electronic trading at UBS Securities Japan, points out that South Korea’s experience with extended trading hours in 2016 did not necessarily result in higher volumes. The TSE’s 2011 decision to reduce the midday recess by 30 minutes similarly failed to boost trading volumes.
Impact on Intraday and Closing Auctions
The introduction of a new closing auction session aims to improve price transparency by allowing traders to place orders just before the market closes. Currently, the TSE conducts a daily auction right after trading ends at 3 p.m. Under the new system, a five-minute auction session will be added just before the close. Masatsugu Takiyama, senior trader at Mitsubishi UFJ Trust & Banking Corp, believes that this change will help clarify the demand-supply balance earlier in the day.
Reactions from Japanese Asset Management Firms
Several Japanese asset management firms, which had previously avoided participating in the closing auction, are now considering joining due to the anticipated increase in trading volume at the close. Tomomi Yokoyama, a trader at Daiwa Asset Management, acknowledges the potential rise in closing volumes but also voices concerns about the impact on intraday liquidity. The significance of closing prices has grown in recent years, driven by passive fund managers adjusting their portfolios at the end of the trading day.
Concerns About Market Liquidity and Regulation
There are concerns that the new closing auction could become more volatile due to the absence of anti-gaming measures that are common at major exchanges. For example, Hong Kong’s exchange implements a two-minute non-cancellation period followed by a two-minute random closing period. In contrast, the TSE will introduce only a one-minute enhanced monitoring period at the end of the closing auction session. Daiwa Asset’s Yokoyama worries that the lack of a non-cancellation period could lead to disruptive last-minute order cancellations.
Market Stability and Investor Confidence
Despite these concerns, some firms, like UBS, remain optimistic. UBS Securities Japan notes that Japan’s price volatility at market close is relatively low compared to other regions, partly due to the significant presence of index arbitrage players who provide additional liquidity. Taichi Baba, head of program trading at UBS Securities Japan, cautions that implementing random closing periods could undermine the liquidity provided by these arbitrage players.
Conclusion
The extension of trading hours on the Tokyo Stock Exchange marks a significant shift in Japan’s equity market. While the move aims to enhance trading volume and market transparency, it also raises potential risks related to liquidity and volatility. As the new trading structure takes effect, market participants and asset management firms will closely monitor its impact, balancing the benefits of extended hours against the challenges of maintaining market stability and investor confidence.
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