Japan Markets ViewTokyo Stock Exchange to Extend Trading Hours: A Look at the New ‘Closing Auction’ System

 

[QUICK Market Eyes] On November 5, the Tokyo Stock Exchange (TSE) will upgrade its cash equity trading system. The new system is called “arrowhead4.0.” With the basic policy of maximizing trading opportunities and improving user convenience, the trading hours for cash equities will be extended. In addition, a new system, “Closing Auction,” will be introduced at the end of trading hours. QUICK held “Seminar Ahead of TSE System Changes” on October 18. The seminar attracted a total of approx. 570 attendees, both online and at the venue, showing a high level of interest among market participants. This article examines the new system, together with a review of the seminar.

 

 

Cash Equity Trading Closing at 3:30 p.m. JST and “Closing Auction” to Be Introduced in the Last 5 Minutes of Trading Hours

The extension of trading hours for cash equities was triggered by the failure of the cash equity trading system in October 2020. In response to the all-day trading halt, the TSE established the “Council for Recurrence Prevention Measures in Response to System Failure” followed by the “Working Group for Strengthening the Functions of the Cash Equity Market.” In October 2021, the TSE compiled an action program to improve resilience and convenience for investors and to strengthen the market’s functions. The action program included specific measures to be considered, such as extending trading hours, and resulted in the revisions to the rules.

Under the new trading system, “Closing Auction,” which is common outside Japan, will be newly introduced to improve the transparency of the closing price formation. After the closing of “Zaraba” trading at 3:25 p.m., order acceptance time (Pre-Closing) will be provided until Itayose at 3:30 p.m. The new system will introduce a “special execution” method to reduce the number of unexecuted trades, which increases the opportunities for closing price formation.

During a panel discussion at the seminar held by QUICK on October 18, an attendee in charge of trading operations at an asset management firm commented, “We can expect that the new system will improve the transparency of closing price formation with the introduction of Closing Auction, but it might reduce intraday trading hours.” A TSE representative expressed the view that trading by day traders and high-frequency traders (HFT) will increase, and that Closing Auction will bring more investors into the market.

The “special execution” method raised some controversy. A number of investment managers commented that it would reduce the number of unexecuted trades, leading to increased opportunities for closing price formation. However, some participants questioned the “time priority” in processing orders in the “special execution.” The TSE representative stated, “We’ve received quite a number of inquiries about ‘special execution’” adding, “While some have found the method difficult to understand, we prioritize time to make it smoother to form closing prices.” Special execution “will normally occur for about one issue per day, and we do not expect a large number to occur,” according to the TSE representative.

The upcoming changes to the trading system are expected to streamline various operations through revisions to the internal rules of investment management firms and the extension of trading hours. However, some market participants are skeptical about the effectiveness of the longer trading hours. It is hoped that an understanding of the new trading system will spread in the market to ensure a smooth launch on November 5.

 
(Reported on October 22)

 

 

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