Upcoming changes in the Japanese equities markets

The Japan Exchange Group (JPX) has announced a range of changes to equities trading on the Tokyo Stock Exchange, to be introduced in November 2024. These updates are designed to bring the exchange more in line with other major global markets and deliver increased price transparency to participants. In this article, we take a brief look at some of these key changes and discuss what preparations firms may need to take.

Changes to the Tokyo Stock Exchange

One important change is a switch from a “market by price” to a “market by order” service. This aims to improve transparency for market participants by providing more granular market data. Following the upgrade, market data feeds will provide a full queue of individual orders rather than displaying aggregated data at each price level.

The highest profile of the planned changes is an extension to trading hours. The afternoon session will be extended by half an hour, to 15:30. Currently, the Tokyo exchange has some of the shortest trading hours of any major equities exchange, and this change is intended to access extra liquidity, especially from international investors.

The structure of the afternoon session will also change, with the introduction of a separate pre-closing auction period from 15:25 to 15:30. This is an important change from current practice, where the Itayose auction runs alongside the Zaraba continuous trading period. There may be wide-ranging effects on trading behavior, particularly around the use of the Funari order type. These are entered as limit orders, but switch to a market order if any volume remains undealt at the end of continuous trading. The new structure for pre-close may well impact how counterparties choose to use Funari orders. During the new pre-closing period, the following order placement rules will be observed:

• At the start of the pre-close period, on-close orders will become valid and Funari orders become market orders.
• During the pre-close period, new orders can be placed; and order modifications and cancels can also be entered. New Funari orders are treated as market orders and new on-close orders become valid immediately.
• At the close of the session, all orders entered at the start of or during pre-closing will be grouped by trading participant and treated as a new group of simultaneous orders, distinct from orders placed during the continuous session.

These changes are intended to achieve more effective price discovery in the closing auction and bring JPX more in line with practices in other APAC markets. But the potential long-term impacts are hard to assess. For example, how will high-frequency traders (HFTs) adapt to the new closing period? All firms that are active in the Japanese equities space will be carefully considering what effect the new rules will have on their business.

Fidessa Japanese trading platform

ION has extensive experience in the Japanese capital markets and we’re continuously looking to deliver innovations to our Japanese equities trading platform. For example, we’ve recently introduced support for algorithmic trading on the Osaka exchange via J-GATE. This allows traders to take a consistent approach to trading across multiple markets and asset classes. And we’re also rolling out a new version of our Implementation Shortfall model, designed to achieve completion goals consistently in challenging market conditions. If you’d like to discuss how ION can help you approach the changing landscape of the Japanese equities markets, contact us today.