Japanese brokers face testing times

Industry data shows a drop in Japan's commodity brokerage numbers from 97 in March 2004 to 53 today, according to information provider Bloomberg.

The Japanese Commodities Exchange Committee says total trading volumes on all exchange-traded commodities in Japan have fallen by 19% in a year, from 29.8 million in March 2008 to 24.2 million in March 2009. Trading volumes at the Tokyo Commodity Exchange (Tocom) have dropped 13% on last year to 41 million contracts for 2008, equivalent to less than half the volume traded in its peak in 2003 at 87.2 million contracts.

"The drop in the number of brokers has resulted in a decrease in proprietary trading that has directly affected the liquidity of our markets," says Masaaki Nangaku, president and chief executive officer of Tocom.

Nangaku attributes the drop in volumes to wariness on the part of investors, more stringent national regulation and some of the exchange's own rules, which they are working to change.

"Primarily, the increased volatility of commodity prices has generated a negative attitude in the minds of individual investors, and pushed up the amount of margin requested to trade at the Tocom markets, which resulted in a decrease in the number of positions held by our market participants," he says. "In addition to this, continued economic distress after the 'Lehman shock' has discouraged players abroad from trading in our markets."

There are also structural factors to the current slump in commodity trading in Japan, Nangaku says. "Under the revised Commodity Exchange Act implemented in 2005, more stringent regulation on soliciting and higher net asset requirements for brokers have forced them to build new business models. This process, which obviously has not been so easy, is still ongoing," he adds.

He also cites Tocom's market environment and market management rules as possible factors affecting volumes. "Firstly, the functions and capabilities of our current trading system have been short of the level needed to meet the requirements of participants from the global market-place. Secondly, our trading hours have been limited compared with the around-the-clock trading that many of the major commodity exchanges in the world offer. Thirdly, our market management rules are not in line with global standards," he says.

Tocom is currently embarking on a programme of reform through the adoption of trading rules in line with global standards and the launch of a revamped trading system on May 7.

"We are pursuing a series of reforms, in order to improve the Tocom market ... which we expect will lead to the recovery of trading volume," Nangaku says. He believes the reduction in the number of brokerages should not further impact the decline in commodity trading. "Brokers have gone out of business because fewer customers trade on Tocom and other commodity markets in Japan. But the impact was rather limited considering that those who wish to continue trading have a number of brokerages to choose from," he says.

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