Daytrading Delayed

Back to Contents of Issue: October 2000

GO TO THE Shibuya Mark City building in Tokyo and you'll find the closest thing Japan has to the daytrading firms active all over the United States: the trading floor of HIS Trade School.

Like the Stateside firms (of which at last count there were just over 130, according to the Securities and Exchange Commission), HIS provides individual investors with high-speed Internet connections, on-site training, and real-time market information and stock quotes. Also like the US firms, the HIS trading floor exists partly to generate business for its in-house execution agent, HIS Kyoritsu Securities.

The 40 investors using the floor, only a few of whom have actually taken the trade school's online investing course, agree to make at least two trades per day, paying a ´yen;2,000 commission on each. Like their US equivalents, these investors make it their full-time job to profit from short-term sales and purchases of stocks. But Yoshio Hayashi, the school's representative director, insists that they're not daytraders. "Daytraders only exist in America," he says. To Hayashi, the defining characteristic of a daytrader is direct access to the markets, which investors have in the US, but not in Japan, where all trades have to go through registered brokers. "In Japan, there is no direct access, so we really don't call that daytrading," he explains.

The difference is not merely semantic. Disparate government regulations, professional guidelines, and market strengths result in contrasting trading environments for US daytraders and their would-be Japanese counterparts. "You can daytrade in Japan with all the online brokerages, basically, but the systems are not so good now," says Tsuyoshi Kitahara, senior investment banking director at Privee Zurich Securities. "If you compare them with the US systems, they're totally different -- we're talking a different world,"

Many view government regulations restricting access to market information as the biggest barrier to legitimate, US-style daytrading in Japan. "In the US," says Privee Zurich financial products director Noriaki Takata, "you see the offer on the bid, of course, and the quantity, but you also see how many offers you have and how many bids you have and the names as well. You see Goldman Sachs selling over here, Morgan Stanley over there. You see these things, so you can judge." US daytraders who trade on the Nasdaq markets use software to analyze the information available to them and then trade based on these sophisticated analyses -- "the same as a professional," Kitahara says.

But others say it's not so much government regulations as industry guidelines that limit daytrading opportunities in Japan. Shogo Noguchi, a securities analyst at Goldman Sachs, points out that the Japanese Securities Dealers Association -- the industry's self-regulating body -- limits investors to buying and selling stocks from a single fund to once a day. US daytraders, in contrast, use in-depth market information to anticipate a stock's movement and then buy or sell accordingly as many times a day as they wish. But since Japanese traders can only buy or sell once, the information would be useless even if it were available.

Noguchi says that other JSDA guidelines intended to protect Japanese investors also limit their ability to daytrade. One such guideline limits the growth or decline of a stock's value within a single day.

"This means that it is difficult for a daytrader to gain big in one day, but it also means that there is little risk of losing big in one day," he says.

Another JSDA guideline forces brokerages to wait four days before settling accounts with investors, as opposed to the one- or two-day gap in the United States. "Daytraders buy and sell many stocks, and if they make a big loss, they don't have to pay for it for another four days," Noguchi says. "So it's very risky for a stock broker to provide a daytrading service -- if the customer goes bankrupt, the stock broker suffers a big loss."

Because of these regulations, Noguchi says, daytrading is not likely to grow as an industry in Japan. However, he does anticipate a rise in the number of Japanese who make occasional trades with the roughly 70 online brokerages now active here. These include exclusively online firms, like Monex and E*Trade, as well as traditional securities firms, like Nomura, Daiwa, and Nikko, that have incorporated online services.

In June, the number of online trading accounts in Japan passed 1 million. Noguchi estimates that this number will increase five- or six-fold over the next five years, as more people go online for the first time and as more of those already there learn about their trading options from advertisements on portal sites.

Still, he says, the number of accounts exaggerates the actual number of investors. In research he conducted last year, he found that the average Japanese online investor has separate accounts with three different brokerages, meaning the actual number of online investors could be one-third of the reported number of accounts. Noguchi says investors open multiple accounts because popular IPO stocks that one brokerage has sold out of are sometimes still available at another. Additionally, since each brokerage uses a different pricing scheme, investors can choose the broker that will offer them the best price on each particular trade.

Noguchi also says that he doesn't foresee the number of online traders growing at the same rate as it has over the past year, when the rapidly increasing value of Internet stocks made investing safer and more profitable for those new to the game. "The sudden increase in Japanese online accounts was brought on by last year's Internet bubble," he says. "With the rise of Softbank or Hikari Tsushin, Sony or Matsushita, Nihon Television or TBS -- all these media and Internet information services -- stocks rose from last year until March of this year. But these companies' stock prices suddenly declined and many online traders have suffered big losses between April and now."

This is another reason, he says, why daytrading and online trading have spread so much more rapidly in the United States than Japan: the strong US stocks offer investors much more than the relatively stagnant Japanese funds. "The Japanese market condition is not so good now," says Noguchi. "Many people who start to do online trading will suffer losses, and once people suffer a loss, they don't do stock trading again."

Kitahara and Takata of Privee Zurich, however, say it was not just market strength, but also government deregulation of brokerage commissions that provided an incentive for the growth of online trading. Before deregulation was introduced late last year, the government-set brokerage fees were too expensive for individual investors to make frequent trades. But, Kitahara says, now that securities companies can set their own commission fees, competition has brought them down considerably.

Soon after these rates declined, Kitahara says, his company's staff saw great numbers of inexperienced investors rushing into the stock market. Understanding that these new traders were unequipped to invest knowledgeably, the firm, in conjunction with the Tokyo Shoka professional development school, started offering an online trading course. During the six-week course, Kitahara and Takata teach amateur investors the basics of online trading: what software to use, where to find the most accurate market information for the lowest price, which brokerages offer the best service, and so on. "Basically what we emphasize here is, 'Go and do it yourself and don't rely on the brokers'" for advice, Kitahara says. "We try to teach them so that they can stand by themselves when they do their trading."

Yukako Yano, a 32-year-old customer service agent for British Airways and a recent graduate of the course, says she's been trading online for the past six months and will bring the knowledge she's gained through the course to her future trades. "I think I've been very successful," Yano says about her past trades. She says she makes about two trades a week and will continue to invest just as frequently.

But, she says, she'll always do her trading from her home computer, rather than on a trading floor like HIS's. Indeed, Goldman Sachs' Noguchi doesn't see a bright future for HIS's online trading floor. Between the regulations that Japan's traders and brokerages have to work around and the general stagnancy of the Japanese market, he says he can't conceive of there being too much growth potential for US-style daytrading brokerages in Japan. "There are several hurdles HIS would have to overcome to make their business a success," he says. "It may be difficult for them to do it."

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