Q&A With a "Market Maker"

Back to Contents of Issue: September 2000

John Desaix
John Desaix
Senior vice president and chief market strategic planning officer at Nasdaq Japan Inc.
It's been said that no full recovery in Japan is possible until individual investors regain confidence in the markets.
I completely agree with that statement. That's why our standards are so high. We don't want companies which don't meet the standards, because we don't think investors should be putting their money into them. We really want to make sure that the quality is out there, and that [people] can have the necessary information to make good decisions. We're not guaranteeing that these companies are going to go up; we're saying that we will make sure investors will have the information they need. Also, I think the publicity on Nasdaq Japan helps get retail investors thinking about the equity markets.

So publicity definitely helps.
With respect to share minimum par values, there are a number of things we need to do -- we've talked to the MOF about it, we've talked to a number of firms in the investment community. I think there's a lot of movement on that issue, and there are some pretty interesting approaches to incorporating that provide a little bit of relief -- having to do with starting out with more shares than you normally see. But more importantly, there's a move to change the laws, to really make it possible for stocks to be trading in price ranges and volumes that retail investors can afford. I think it may yet take a couple of years. But there's a large portion of the government that recognizes that [the current situation] is not effective at trying to avoid corruption, and at the same time, it's hampering retail investors' participation.

Those are really the major things we can do -- bringing in companies that have lots of interest for investors, bringing in companies where the management is interested in secondary trading -- who want the stock to be active, who are not just trying to cash out. These are really important things.

We really are encouraging the underwriters to maintain [good] analysis and coverage of the companies they underwrite so that people get research reports regularly -- and keep the interest up. Quarterly reporting will help. If you get quarterly financials, that's twice as much annual information than people get now.

Who are Nasdaq Japan's customers? Which constituency do you serve?
A market has a varied and not always aligned constituency. Our major customers include investors, both institutional and retail; the issuers, the companies who sell their stock; and then the underwriters and brokerage firms. So there's really four major groups -- I would keep the underwriters and the brokers separate. A fifth group -- and it's not just in Japan, it's everywhere -- is the government regulators. They are a very important participant in this market. You've got to keep them informed, you've got to keep them in the loop, so that at no point are we perceived as primarily not serving investors.

But who is your top customer?
We know that if the brokers are our No. 1 priority, we get into trouble. If the investors are, we get into trouble, likewise with the issuers. That's what makes the exchange itself a rather difficult entity. One of the factors is that Nasdaq Japan will be a publicly traded company at some point in the future. We hope to do a private placement and go through that whole process. So Nasdaq Japan Incorporated will be a for-profit company. One of the things that does is focus investment strategy within the company -- we don't end up wasting resources.

Will the linkages between Nasdaq USA, Japan, and Europe allow a trader in Japan to trade on Nasdaq US, for example?
Once we have our full system up, they will be able to do that. There are regulatory issues -- coming into Japan, currently, you've got to go through a local broker, same as for the US. So we will have to explore these with the SEC and the MOF, and say, "How can we set this up so that you feel there is absolute regulatory compliance and an audit trail -- and yet still provide the flexibility to do this?" The MOF has indicated that they're very anxious to work with us on the cross-border issue. I think we'll be able to come up with some good solutions. We don't have a firm answer yet, but there are mechanisms in the current regulations to allow it. It will be the latter part of next year before we can offer anything.

Do you see a time when a broker who becomes registered to trade on Nasdaq Japan will automatically be registered to trade on another Nasdaq market?
No. But one key issue for us is to what extent we will be able to provide remote access to the system -- and this is mostly for Asia. Are we going to be able to have brokers in China, Korea, or other Asian countries linked directly into terminals on Nasdaq Japan? Long term, I think it's going to be necessary for a market to provide that in order to be competitive. It is a difficult issue from a regulatory standpoint.

Of course, on Nasdaq Japan, we will be providing Japanese investors direct access to US stocks, and we will look into providing some sort of order routing capability -- hopefully this year.

If there's not going to be a direct linkage, why be here? What's the benefit of having Nasdaq Japan?
There are three strategic objectives for us. Improve disclosure -- really leverage off the Nasdaq brand by using the Nasdaq listing standards. Our standards are basically the Nasdaq US standards. They are substantially higher than on Mothers. We have ongoing financial requirements for maintenance -- for staying on. If a company's stock drops too low, they'll get thrown off. The second aim is the creation of a hybrid market, for the second half of next year. We'll combine the dealer and the auction market models as a means of providing more and better liquidity. This will also help keep the spreads narrower for the investments. Without market maker participation, it will be difficult to boost liquidity. The third aim is providing global trading.

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