Technology Compatibility Pushing Japan Exchanges to Merge?
Consolidation of Japan’s exchanges is nothing new with TOCOM, most recently, absorbing most of Tokyo Grain Exchanges products and trading operations and C-Com closing its doors. There are now 4 major exchanges in Japan – the Tokyo Stock Exchange (TSE), Tokyo Financial Exchange (TFX), Tokyo Commodity Exchange (TOCOM) and the recently improved Osaka Securities Exchange (OSE).
From a product standpoint the Nikkei 225 (on OSE) and the TOPIX (On TSE) would seem reasonable complimentary products to trade on one exchange akin to the CME traded NASDAQ 100 and S&P 500. The OSE also has a small equity business which would give the OSE/TSE entity a stronger position to compete with the price improving, service oriented PTSs.
The TFX offers the Euroyen, an interest rate futures product, which could fit nicely with JGB also found on the TSE. These debt products mirror the Eurodollar and 10 year Treasury note also found on the CME. TOCOM, with the virtual elimination of the TGE, is the only game in town for commodities trading so perhaps they don’t need to merge at all at least from a product stance.
From a technology viewpoint supporting more than one platform requires double the staff with dissimilar knowledge, performance measurement tools that may only support one platform and custom development to allow the different systems to talk. Needless to say this is expensive and not an optimal scenario for any business let alone an exchange about to step into the abyss of global competition.
Then how does Japan’s overall exchange technology complement each other, eliminate duplicate staff and achieve economy of scale? Let’s start with TSE Arrowhead. It was developed in-house with Fujitsu providing the infrastructure and NYSE Euronext the feed handlers. Its futures platform, Tdex+, is built on NYSE Euronext technology. That is to say that TSE is a proprietary system for equities trading and vendor built in the futures business. The TFX, whose last exchange upgrade was in 2008, is using LIFFE Connect now a part of NYSE Euronext. At least on the futures side the TSE and TFX present a fairly tidy marriage in terms of technology.
On the flip side of the coin we have TOCOM built on NASDAQ OMX technology and the recently improved OSE also on Click XT. Interestingly enough, the system integrator was NTT Data for both exchanges as well. Furthermore, both exchanges announced last December that TOCOM will use OSE’s Emergency Backup Facility for its own redundancy needs. If you ask me this omiai is on its way to the shrine.
If we remove regulations, politics and global exchange competition is technology compatibility an underlying driver of further consolidation in Japan?