Stock Market Shake-ups in US and Japan
American and Japanese markets undergoing significant structural changes
As we speak, two key structural developments are taking place across US and APAC equity markets.
On 18 September 2024, The Securities and Exchange Commission (SEC) unanimously voted to allow stock exchanges in the US to price many shares in increments or ‘tick sizes’ of $0.005, rather than the current minimum size of $0.01. The new increments will apply to equities trading over $1.00 per share and those that are governed under the National Market System (NMS) regulations, which oversees all formal exchange-based trading in the US, such as trading on the New York Stock Exchange and OTC trading on the NASDAQ.
The new rules will seek to promote more competitive pricing and reduce investor costs when trading in the equities markets. Reducing the tick size down to $0.005 will result in narrower bid-to-ask spreads, allowing for more aggressive pricing and better price discovery. At the same time, the new rule will help stock exchanges to compete with off-exchange trading venues, which account for roughly half of US trading volumes and can already offer smaller price increments.
Under the new measures, the SEC also reduced the access fees that users (i.e. brokerages) pay to the exchanges to obtain their price quotations by two-thirds. The rules will come into force in November 2025.
The new rules will likely have the biggest impact on brokers, including big banks and high-frequency trading firms. In particular, those that utilise algorithms to profit from wider bid-ask spreads will be most affected, although this may be partially offset by the reduction in access fees. Nevertheless, the changes will in some cases require market participants to rethink trading strategies and the extent to which they allocate liquidity to equities facing the new measures.
Tokyo extends stock trading hours
The Tokyo Stock Exchange (TSE) has confirmed that it will extend its cash equities trading hours by 30 minutes, beginning 5 November 2024. The TSE’s market close will now be 15:30 instead of 15:00, lengthening the daily session to 5 and a half hours. TSE will also introduce a closing auction session between 15:25-15:30 to accommodate the increased trading volumes at the end of the day. Interestingly, this auction session will commence during trading hours, rather than after market close as seen in the current model.
The main objective of increasing TSE trading hours is to ‘strengthen the functions’ of the exchange, by increasing trade volumes and allowing more time to address operational bottlenecks. In October 2020, trading at the TSE was suspended for an entire day due to a catastrophic computer malfunction. A longer trading day would allow for a possible resumption of trading the same day after the computer problem is fixed.
While this move from the TSE has been in the pipeline for more than a year, concerns are growing that it could stoke further market volatility as we creep towards the November ‘go-live’ date. In particular, market players in the region have stated fears that markets may become less liquid and more volatile if the same volume is spread over longer hours, with last month’s stock market crash, which saw the Nikkei 225 index drop a whopping 12.4 per cent, serving a visceral reminder of the current risk in Japanese markets.
The change would also move the TSE closer to the trading practices at other major stock exchanges. The 30-minute extension would give it the same number of trading hours as the Hong Kong exchange, but it would still lag behind the New York Stock Exchange, where trading lasts six and a half hours, and the London Stock Exchange (that operates two hours longer than New York).
With the prospect of increased market volatility and possible decline in intraday liquidity, financial firms trading through the TSE should reconsider execution strategies and weigh up the ramifications of more market participants utilising the newly created closing auction session.