"I WAS BORED," says a smiling Kiyomi Saito as she recounts the story of JBond Securities’ creation while ushering Euromoney into the firm’s tiny Tokyo office. "I had earned enough money from hedge fund sales, so when [JBond COO and former bond trader] Daisuke Murakami came to me with the idea I agreed very quickly. At the time we thought we’d only be creating a provider. We weren’t sure if we’d need a PTS [proprietary trading system] licence from the FSA but we didn’t want to waste time so we went ahead with raising capital and ended up receiving the licence just 17 days after applying. I believe other players such as Bloomberg and Yensai spent more than a year getting the licence."
Five years later and JBond is still in business, but Saito says that the pace of the development of the e-trading market has been frustratingly slow. Indeed, it has been lethally slow for some: there have been several failures already, including one effort by Italy’s MTS and a joint attempt between Lehman Brothers and Softbank at a platform for trading corporate bonds. Now JBond’s main rival is Yensai.com, a larger operation owned and backed by a consortium of participating dealers that includes the major Japanese securities houses. JBond was born of venture capital and its shareholders are independent; Yensai.com is owned by the brokers that deal on it, each of which paid an average initial investment of ¥150 million ($1.27 million). The two firms apparently have a fierce rivalry, but as the market struggles to develop, one controversial opinion has emerged: what if one of them were not trying to promote electronic trading of JGBs but actually had a vested interest in stifling the market?
Not in our interests
Many securities bankers in Japan admit privately that electronic trading is the future, although it might hit their margins. As one plain-speaking debt capital markets banker says: "Electronic trading is not in our interests. It will cost us. It’s better for us to trade over the phone, and I think that clients enjoy the experience of speaking to an actual person." This banker works for one of the securities firms that holds a stake in and deals through Yensai.com, so it is interesting to hear him say that the trading platform’s interests run somewhat counter to his own.
Independent research firm Celent published a report in May 2006 on the e-trading market that mentioned this potential conflict of interest.
"It is not clear," wrote Asia research manager Neil Katkov, "whether the major dealers of Japanese government bonds are 100% behind e-trading, particularly in the client-dealer market. E-trading tends to increase transparency in a market, narrowing price spreads. In this sense, the dealers active in the JGB market would have a natural motivation to block the rise of e-trading in the client-dealer market especially. One view has it that this was the strategy behind the creation of multidealer platform Yensai.com by a consortium of Japan’s biggest securities firms. This view holds that Yensai.com was set up as a nominal client-dealer e-trading operation, with no intention of building up significant trading levels, in order to block some more savvy player – such as a TradeWeb – from entering the market and actually succeeding in building up successful e-trading in JGBs."
Saito believes that the exclusivity agreement secured by Yensai’s participating dealers when it was being created in 2000 hindered potential rivals, who were prevented from signing those brokers up for three years. She and Murakami were putting JBond together at the same time, and circumvented the problem by approaching the foreign securities houses that were not part of Yensai.com. Credit Suisse and Deutsche Bank now trade through both platforms, but other houses in Japan operate either on JBond or Yensai – a great source of frustration for investors, who are prevented as a result from obtaining as full a comparative spectrum of prices for any given paper as they would like.
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Interdealer e-trading heats up... |
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Percentage of trades done electronically on the interdealer market |
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...but clients left out in the cold |
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Percentage of trades done electronically on the client-dealer market |
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Source: Celent |
Yensai.com’s CEO, Hidemi Senda, offers his own version of the founding of the two firms. "JBond and Yensai.com started their projects in the year 2000. Both had decided independently to provide the service because of the trend in the global market towards electronic trading. There was a shift towards T+1 or straight-through processing and a greater need for best execution. Some of Japan’s securities houses decided that they should launch their own platform in response to these developments, and so Yensai.com was created. I don’t think it’s a big issue that these securities firms are shareholders in the platform."
In his report, Katkov goes on to say that the question of whether "diabolical schemes [ie Yensai’s supposed obstruction of the growth of the market] are actually lurking beneath the surface of Japan’s government bond market... will eventually become a moot question," since regulatory pressure and global market trends tend to suggest the inevitable victory of electronic trading. Nonetheless, the view of Yensai’s purpose that he cites is sufficiently controversial to bear putting to Senda.
Save time and energy
"I can understand the way of thinking that says investors aren’t getting the best transparency they could because it is not in the banks’ interests," he says. "Our platform is, however, very clear for investors to use. We know that transparency is very important for them, and they can see the bid-offer spread online. Of course the major strength of our platform is that most of the major securities firms in Japan use it. For these dealers, by using our services they can save time and energy on the large volumes of JGBs they sell and concentrate on other matters."