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Competitions of principle exchanges and securities companies

When it comes to stocks and other exchanges, the situation in Japan can be said to be the highest level, and financial instruments exchanges have extremely high barriers to entry for new comers.

For this reason, there are many people who view the Japan Exchange Group as having no competition and being stable.

However, the situation has changed recently and the Japan Exchange Group is by no means stable.

This is because competition with securities companies and between exchanges are intensifying.

First, let’s take a look into the share dispute between securities companies and TSE (Tokyo Stock Exchange).

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PTS (private Securities company) versus Tokyo Stock Exchange

At first glance, it may seem that financial instruments exchanges and securities companies are not in a competitive relationship because of the mechanism of relationship between platformers and users.

However, it is important to note that in recent years, a securities company has developed a platform that is unique and close to an exchange, and a share battle has begun with TSE.

PTS (private exchange) market is a new form of exchange of a securities company that is relatively familiar to TSE.

Previously, there were principles of concentration on exchanges, and trading was concentrated on the primal exchanges such as TSE, but PTS was recognized as a new form of trading market.

Internationally, marginal trading was also lifted, and the convenience of PTS for individual investors has increased greatly through the development of internet.

The monthly trading value reports the highest ever every year.

PTS (private exchange) market brings many benefits for individual investors in terms of night trading and lower transaction fees, and the market share is increasing.

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What is dark pool? How it works?

The disputes of principle exchanges and securities company are not only for individual investors but also for institutional investors.

Recently, institutional investors use mainly dark pools operated by securities companies.

In many advanced countries like Japan, the use of dark pools is regulated as a separate market from PTS transactions, and have characteristics that are very different from the normal transactions we envision.

First of all, the origin of the name of the dark pool, and the biggest feature is that “the liquidity information and the price board information are not disclosed”.

In other words, you can’t know how many orders are in what price without actually placing an order.

Looking only at this, it is easy to highlight the disadvantage of not being able to trade at the intended price or quantity, but this is rather convenient for institutional investors.

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Why institutional investors use dark pools?

In general, the amount of stocks traded by institutional investors can range from 0.01 billion dollars to 1 billion dollars.

If this transaction is bought and sold in a market where transaction information such as TSE is disclosed, there is a disadvantage for institutional investors.

That is, before buying a certain quantity at the intended price, other market participants will perceive the market price trend.

Depending on the liquidity, it may take several days or more to handle sales of billion dollars for institutional investors.

In the meantime, the intention of trading may be known by other retail investors or institutional investors.

In this case, other market participants will be actively trading to back up the stable trend created by institutional investors, causing the stock price to rise or fall significantly before the planned number of shares is raised or fallen.

In the case of buying, there is still an option to interrupt the transaction, but it is more difficult if it must be sold out.

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Share of Dark Pool is increasing

If you use a dark pool, you can execute trading without impacting the market.

In other words, it is a matching service between institutional investors.

In recent years, there are more movements to open the dark pool to individual investors.

For individual investors, there is an advantage in that a trade can be executed at a better price than the market price, and for institutional investors, there is an advantage to absorb the buying and selling market flows of individual investors anonymously.

Dark pool is also a market operated by a securities company like PTS.

According to data from the Japan Exchange Group, the share of the dark pool has reached 5.6% in 2016, and is expected to increase further due to the increasing numbers of individual investors.

When combined with PTS, at least 10% of the market share is lost from TSE.

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The biggest exchange is no longer NYSE

By the way, what do you think is the world’s largest exchange group? Is it the New York Stock Exchange (NYSE)?

The answer is no, the world’s largest exchange group is no longer NYSE.

The current largest exchange group in the world is the Intercontinental Exchange (ICE).

ICE acquired NYSE Euronext, formerly the world’s largest exchange group in 2013, thus making ICE the world’s largest exchange group.

The background of the event is a decline in sales and an increase of system liabilities due to competition between exchanges.

Traditional markets like NYSE were unable to adapt to changes in the trading environment such as “exchange to PTS or dark pool” or “stock to derivative” and led to worsen profit margins.

The sales of NYSE Euronext before the acquisition peaked in 2008, and ICE which is better at derivatives, acquired in 2013.

From an international point of view, there are cases where exchanges that were not well-known so far have acquired prestigious markets such as NYSE and become huge.

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