Grading the Exchanges

It's been a year since Nasdaq Japan and 18 months since Mothers launched. They were supposed to help high-tech startups go public and raise money. Are they doing what they were designed to do?

It was back then that people were talking about "Internet time" and "mindshare over profit." Waiting years before a new company could go public in Japan no longer seemed acceptable. Mothers and Nasdaq Japan sought to make it easier and faster for companies to conduct initial public offerings, reducing the application approval time from years to one or two months.

The Tokyo Stock Exchange (TSE) launched its Mothers market (Market of the High-Growth and Emerging Stocks) in December 1999. The hasty launch of Mothers was seen as a move to pre-empt the arrival of the Nasdaq Japan market announced by Soft-bank Corp. and the National Association of Securities Dealers (NASD). Nasdaq Japan began trading half a year later in June 2000.

Listing requirements for the TSE's two main boards, First and Second Sections, are stringent and beyond the capabilities of startup companies. Even its Second Section requires companies to have a minimum three-year operating history, ¥400 million profit in the latest year and ¥100 million profit the year before, and capital of ¥1 billion.

Until recently the typical path for Japanese companies was to list on the Jasdaq over-the-counter (OTC) market, run by the Japan Securities Dealers Association (JSDA), until graduating to the prestigious Tokyo Stock Exchange. The OTC market played a supportive role for the TSE until November 1998, after which it was allowed under deregulation to become a separate and competing market. But getting approval to list on even the OTC market sometimes took up to three years, assuming a company was in business long enough to meets its financial condition requirements. It was not unusual for a company to wait 30 years before going public.

Now venture companies have a choice of three markets on which to conduct their IPOs, not including similar new markets at regional exchanges like the Sapporo Stock Exchange's "Ambi-tious" market and the Osaka Securities Exchange's New Market. Companies conducting IPOs on the three markets are estimated to have raised a record ¥548.8 billion in 2000, during which a record 157 companies went public in Japan, according to Nihon Keizai Shimbun.

As of March 31, 32 companies had IPOd on Mothers and 42 on Nasdaq Japan (not including companies that migrated from other markets) since the markets' inceptions. During the same period, 121 companies went public on the Jasdaq OTC market.

While there is no denying that a rivalry exists between Mothers and Nasdaq Japan, both are eager to point out that they are as different as apples and oranges. As the venture part of the Tokyo Stock Exchange, Mothers specifically seeks to attract emerging companies, while Nasdaq Japan targets a broader variety of companies and aims to rival nothing less than the TSE First and Second Sections.

Naturally, Mothers and Nasdaq Japan seek to leverage their respective affiliations with the Tokyo Stock Exchange, which controls over 80 percent of Japan's trading value, and the US Nasdaq, the world's largest stock market.

Mothers operates as a market within the Tokyo Stock Exchange. Mothers offers issuers the advantages of being traded on the same time-tested, computer-automated trading and settlement system as the rest of the TSE and of being part of the dominant TSE even if they have not yet qualified to get promoted to the First or Second Section.

Nasdaq Japan has teamed up with the Osaka Securities Exchange (OSE) to operate as an independent market within the OSE; it currently utilizes the OSE's automated trading infrastructure. The Nasdaq Japan market consists of two sections, Standard and Growth, synonymous with the National and SmallCap sections of the US Nasdaq market. Nasdaq Japan offers issuers the advantages of being traded in the future within Nasdaq's global network of exchanges and soon on a trading system that incorporates the market-making features that have made the US Nasdaq a success.

LISTING REQUIREMENTS
As far as listing requirements, the two new markets have had to find a balance between ease of listing and quality assurance. One of their goals was to make it easier and faster for companies to go public compared to before. On the other hand, they must also reassure investors that these companies meet certain standards.

In regard to listing and maintenance requirements, Nasdaq Japan says it has taken the higher road. For example, while Mothers requires a minimum market capitalization of only ¥500 million at the time of listing and no stipulation for profits or net assets, Nasdaq Japan's Growth Section requires a minimum market cap of ¥5 billion, net assets of ¥400 million, or pre-tax income of ¥75 million (similar to the criteria on the US Nasdaq SmallCap market). Mothers would point out that Nasdaq's criteria say "or," not "and." For those companies with a market cap under ¥5 billion, Nasdaq Japan requires at least one year of operations. Mothers only requires that sales be recorded prior to applying.

Issues on Nasdaq Japan's Growth Section face delisting if market cap falls below ¥3.5 billion, net assets fall below ¥200 million, or pretax income falls below ¥50 million. Furthermore, they must maintain at least 200 shareholders and a float of 1,000 trading units with a market cap of ¥100 million. (A trading unit ranges from 1 to 1,000 shares.) Issues on Mothers have the same delisting criteria as those on the rest of TSE, which include falling below 150 shareholders or having excess liabilities in the past three years.

In a trade-off for the lower listing requirements, Mothers says its disclosure requirements are more stringent than any of the other markets, including TSE First Section. It points out that it was the first market in Japan to require quarterly financial reports, with balance sheet and profit/loss statements (not just sales as with Jasdaq) and a CPA review report. Japanese law only requires annual and semi-annual reports. Nasdaq Japan also requires quarterly reports, with balance sheet and profit/loss statements and MD&As (Management's Discussion and Analysis of Financial Condition and Results of Operations). Mothers' issuers must hold analyst meetings at least twice a year for the first three years after listing.

While Nasdaq Japan would like to institute the same kind of disclosure and transparency in Japan as in the US, it recognizes that at least for now it must concede to the reality of a different attitude towards corporate governance in Japan. For example, while US Nasdaq requires a minimum of three independent directors on the board, no markets in Japan have such a requirement.

John DeSaix, senior vice president and chief market strategic planning officer of Nasdaq Japan, Inc., says, "The biggest difference between the listing standards in Japan and the US is having an independent outside director, which is probably the most important factor for encouraging firms and issuers to really adopt an attitude toward fiduciary responsibility."

He adds, "It is something that I'm sure we will adopt in the future, but right now there is perhaps too much of a business culture [in Japan] whereby the company has to be run by insiders."

In Japan founders typically maintain a large, if not controlling, stake in their companies, and boards consist of directors from within the company or from friendly major share-holders.

"The area where we definitely met some resistance had to do with having to reveal information that would possibly be beneficial to competitors -- how much of the corporate management plans need to be disclosed in prospectuses, how much of the minutes of the board action and shareholder meetings need to be disclosed," says DeSaix. Prospectuses and management reports are not as robust in Japan as in the US.

He cites another difficulty in unilaterally imposing requirements such as outside directors: "In the US, those requirements are controlled by the SEC (Securi-ties Exchange Commission), but in Japan it's up to the individual exchanges. So if one exchange adopts a stricter standard in a certain area of governance, such as independent board members, then any firm that wants to avoid it can list on other exchanges."

The Tokyo Stock Echange, home to Mothers

Japan's Securities and Exchange Surveillance Commission (SESC), although an independent regulator, is under strong influence from the Ministry of Finance (MOF) and is considered lax in financial regulation compared with its US counterpart.

Mothers and Nasdaq Japan are both trying to educate companies on the importance of corporate governance and investor relations (IR), which have historically been given little emphasis in Japan. The Mothers Supporters Club and the Nasdaq Japan Club offer seminars, information services, and networking opportunities to issuers and other market participants. They make active efforts to promote IR activities, such as the distri-bution of issuer information through TV and the Internet.

Mothers' head of new listings, Hiroyasu Shirahashi, notes, "Before, TSE did not provide all these various services. But now that it has means that there's a market environment, and also that many newly listed companies have appeared and if they don't make these efforts they may lose their sources of investment."

QUALITY IS WHAT MATTERS
In competing for listings, much hubbub has been made in comparing the listing standards between the markets. But both markets are keen to point out that the criteria represent minimums and that most of their issues meet criteria well above those minimums. For example, the majority of Nasdaq Japan's IPOs have been on the Standard rather than the Growth Section.

As of March 31, 2001, IPO issues had an average market cap of ¥25.9 billion on Mothers and ¥28.6 billion on Nasdaq Japan (¥11.8 billion for the Growth Section and ¥33.8 billion for the Standard Section). Large issues such as Sky Perfect Communications on Mothers and Softbank Investment on Nasdaq Japan, however, did help to boost these averages.

"The listing standards are less important than the quality of the companies," says Stanley Sakai, managing director of venture capital firm H&Q Asia Pacific. He adds, "I look at Nasdaq Japan and Mothers as being the flip sides of the same coin, because at the end of the day they're all swimming in the same pool."

Investors will judge companies on their performance rather than on which market they are listed. The quality of some of the issues on the new markets, however, has been a concern for investors.

Mothers' Shirahashi explains, "In the first half of last year there were many Internet-related ventures, and many companies -- as well as the market mentality -- bought into future expectations. But in the second half, the market mentality changed, and the number of companies with actual results or the ability to implement increased."

"Through the first half," he continues, "Net-related issues had rapid ups and downs. For some that initial impression has remained strong, but share prices settled in the latter half, and issues with stable share prices have definitely appeared this year."

Shirahashi adds, "I feel some in Japan's mass media evaluate too much on a short-term basis." He says the concept of Mothers is to nurture venture companies but that they take time to prove themselves. "The same can be said about the markets. Evaluating Mothers or Nasdaq Japan in half a year or one year is a bit overdoing it. It took a considerable number of years before Nasdaq or [Germany's] Neuer Market could be truly evaluated as markets. We'd like people to look over more of a medium to long-term span," he says.

H&Q Asia Pacific's Sakai agrees: "This is a long-term evolutionary change, not something that's going to take place over the next year but over five to 10 years."

Aaccording to Shirahashi, "US Nasdaq issues such as Microsoft and Intel were not blue chips from the beginning. I heard that in the '70s, Microsoft and Intel wanted to list on the NYSE but unfortunately weren't able to, so they listed on Nasdaq. As a result, they stayed on Nasdaq and have since become its star players."

"Over time the quality of the companies will be improving," says Sakai. "If we venture capitalists do our jobs right, the next generation of companies will be a further progression in the development of capital markets in Japan."

Quality is not merely a statement about the entrepreneurs and the companies they found but about the whole industry, including VCs, underwriters, lawyers, and auditors. Silicon Valley-- style venture capital has only recently begun to make inroads in Japan.

Venture capitalist Sakai says, "One of the areas we expect to see improvement in over time is our ability to bring in top caliber management from some of the larger corporations here in Japan, and that is one of the key success drivers with respect to improving the management skill set of some of the venture companies here."

Recruiting professional management executives for venture companies has been difficult in Japan because of the traditional attitudes toward lifetime employment and company loyalty. But the new stock markets are representative of the changing attitudes. Mothers' Shirahashi notes, "In the past, starting a 'venture' was seen as something for those who couldn't become salarymen."

IMAGE PROBLEMS
The issue of quality surfaced again with an incident involving suspicions of organized crime involvement in the Mothers market's very first listing, Liquid Audio Japan. Last October, Masafumi Okanda, the former president of Liquid Audio Japan, was arrested for allegedly kidnapping and detaining for three days in 1999 a former colleague who was planning to launch a rival online music business. Last April, Digicube, which was also making moves into the online music business, found bullet holes in its headquarter door. Okanda, who cannot explain why his "donations" to a right-wing political party with known yakuza ties coincidentally increased the following month, is suspected of being connected with the shooting as well, as the kidnapping victim was working with a Digicube affiliate.

In a separate incident last July, the chairman of online music distributor Entremuse was arrested on suspicion of hiring gangsters to force the company president to resign during a boardroom dispute. The arrest occurred as the company was about to list on Mothers.

Peter Fuchs, managing director for Japan of global financial information portal www.stockhouse.com, remarks, "These incidents have helped bring attention to the obvious need for better disclosure, better due diligence, and more responsible action by underwriters."

Since those incidents, Mothers has begun to work with police to conduct background checks on its listing applicants. Mothers' Shirahashi says, "The best prescription is for the police authorities, who hold information, and us to exchange information continually and regularly. We were able to create this relationship from an early stage, so we now exchange information frequently."

Shirahashi mentions other parties who must also bear the brunt of responsibility. "It is not only us who have to ward off anti-social influences. VCs, auditors (CPAs), securities firms, and we at TSE must each screen and pay attention. These many layers of the filter are now checking more carefully than ever before. Naturally, it is also necessary for the issuers themselves to take meticulous precautions."

Of course, even the largest of stock markets is not immune to the involvement of organized crime in its listings. Mobsters are not endemic to stock markets, either. yakuza are inconspicuously involved in a slew of everyday business activities in Japan from banking to beverages. Racketeers called sokaiya, who extort money on the threat of disrupting shareholder meetings, have been a mainstay of corporate Japan for years.

It is hoped that with the new sources of funding from venture capitalists and the public markets, entrepreneurs will be less susceptible to the dirty money of gangsters.

Nasdaq Japan's credibility has been scrutinized by an association of another sort -- its association with Softbank. When Masayoshi Son announced his plans for bringing Nasdaq to Japan, some worried that Softbank, which has a 50 percent stake in Nasdaq Japan Inc., would take advantage of it to make capital gains on its own portfolio companies and at favorable terms. Since the initial fanfare, Son has learned to stay out of Nasdaq Japan's limelight because of the conflict of interest issue.

Nasdaq Japan's DeSaix responds, "Masayoshi Son plays no role in Softbank companies listing on the Nasdaq Japan market. The approval to list companies on the Nasdaq Japan market is granted by the Osaka Securities Exchange, which conducts a rigorous screening and review of companies based on our listing standards. Out of the close to 100 hundred companies in which Softbank invests, there have only been three Softbank-related companies that have listed on our market since June 2000 (Softbank Investment, Morningstar Japan, E-Trade Japan)."

ILLIQUIDITY AND VOLATILITY
Besides perception problems, the Mothers and Nasdaq Japan markets have also been subject to the trading problems of illiquidity and price volatility.

A glance at the inset table of IPOs shows that many issues only have a few thousand shares outstanding, priced at levels beyond the reach of the average individual investor. The floats (shares not held by insiders and available for trading) are even smaller. For many of these issues, only a few shares change hands everyday -- or none at all on some days.

"As venture capitalists, we need liquidity in the market to exit, and this requires scale in company size and market cap and sufficient float of the stock," says H&Q Asia Pacific's Sakai.

The small floats are a problem for both institutional investors, who need to trade in large blocks, and individual investors, who can ill afford the high-priced shares.

But the liquidity problem is not specific to Mothers or Nasdaq Japan. For example, it has long been recognized as a problem for Japan's traditional market for small-caps, the Jasdaq OTC market. Although liquidity is a concern for small-cap stocks anywhere, a large part of the problem in Japan stems from the distinctive capital structures of companies regulated under the Commercial Code.

Attorneys Kouji Ishikawa and Michael Yoshii of White & Case (Tokyo)/Kandabashi Law Offices clarify the problem. In his legal memorandum, "Securing the Liquidity of Venture Company Stock," Ishikawa states, "Although the [liquidity] problem has many origins, the single most important cause is Japanese venture companies' having established a capital structure premised on par value stock of ¥50,000 per share."

The Commercial Code stipulates that a corporation's par value shares must be backed by ¥50,000 in net assets. But for venture companies with poor net assets this stipulation has had the effect of limiting the total number of shares that they can authorize. Even if ¥50,000 par value stocks are split, ¥50,000 in net assets per share must still be maintained post-split.

Ishikawa and Yoshii point out that venture companies can get around this limitation by issuing a large number of no-par value shares. Although a corporation must issue at least 200 shares with a par value of ¥50,000 to satisfy the ¥10 million paid-in capital requirement at incorporation, no-par value shares can be issued at any price thereafter.

"The lack of liquidity for venture companies has been recognized as the most serious problem of the TSE Mothers and Nasdaq Japan markets, and the no-par structure has become seen as the best fix to the problem," says Yoshii.

A pioneer in developing this no-par value capital structure for venture companies, White & Case has confirmed the structure's legality with the Ministry of Justice and with the stock exchanges. Although there are complex legal and tax issues associated with no-par value shares, Ishikawa and Yoshii say the obstacles to acceptance are not legal ones but lack of information and resistance to change.

While most entrepreneurs would like to see their companies' shares traded by as many people as possible, many underwriters and some entrepreneurs believe a higher priced stock looks more attractive. Some underwriters may also find it easier to sell to a small number of institutional investors than to a large number of retail investors.

Online broker Monex, the first company to go public with no-par value shares, created some 18,000 individual shareholders with its IPO on Mothers last August, well above the minimum 300 shareholders required by Mothers and Nasdaq Japan. A few other companies have followed suit, and acceptance of this experimental solution appears to be widening.

"The predictions of certain traditional underwriters that Japanese investors would refuse to invest in a company with sufficient shares for liquidity have proven incorrect," says Yoshii. "Several major Japanese VCs have invested in our startup clients who have adopted the no-par structure. Whereas previously only foreign investors were brave enough to try the new capital structure, recently more Japanese VCs have accepted it for their portfolio companies."

Stockhouse.com's Fuchs believes it could be taken one step further. He says, "The new markets could force companies to split their shares with no-par values before the IPO. These high stock prices were mostly for vanity reasons."

But it doesn't look like either Mothers or Nasdaq Japan is willing to force companies to do so just yet. Instead, they are trying to convince companies of the merits of having large floats by splitting their stocks and/or issuing no-par value shares. "Nasdaq Japan has formally endorsed the no-par stock structure, and has recommended it to listing applicants who do not have sufficient shares for adequate liquidity," says White & Case's Yoshii. Mothers and Nasdaq Japan, as well as other groups such as the volunteer nonprofit Venture Business Association, are also lobbying the government to reform the antiquated Commercial Code.

Mothers requires that at least 1,000 trading units be issued in the primary public offering and Nasdaq Japan at least 500 trading units through the primary public offering or second offering. Nasdaq Japan requires in addition that the public float consist of at least 1,000 trading units with a minimum market value of ¥500 million. A larger-cap issue with a 1,000-share trading unit would therefore have a minimum float of one million shares, but these shares would still have to be traded in 1,000-share blocks, of which only 1,000 would be in circulation.

Neither Mothers nor Nasdaq Japan has requirements regarding the size of the float as a percentage of the shares outstanding. The TSE First and Second Sections require that at least 25 percent of outstanding shares be in the float. Germany's market for ventures, the Neuer Market, requires a 20 percent float.

Nasdaq Japan will try to address the liquidity problem in one other way. It has been gearing up to switch late this year to a hybrid trading system that combines the order-driven auction system, currently used by both TSE and OSE, with a quote-driven market-making system, used by the US Nasdaq market and recently the Jasdaq OTC market (the "aq" suffix stands for "automated quotation").

Market-making improves liquidity by allowing multiple dealers to act as middlemen competing for buy and sell orders. Nasdaq Japan plans to use the market-making system to trade low liquidity stocks and the auction system for the more actively traded stocks. But given that the low number of outstanding and floating shares is the root of the liquidity problem, it remains to be seen how much effect this market-making system will have.

VENTURE COMPANIES
For venture companies, young and not-so-young, the new stock markets have provided an important source of capital. For most companies, the boost in profile from conducting an IPO is just as important, if not more so, than the funds raised. The increased visibility helps in promoting their products or services, forming business alliances, and recruiting staff.

In the beginning, there was concern that there would not be enough IPOs to go around. But it seems that each market has had something different to provide.

In the past year the Jasdaq OTC market, which does not allow dual listings, lost some defectors like Digicube to Nasdaq Japan, but attracted other high-profile names such as online mall operator Rakuten and brick-and-mortar retailer Toys-R-Us Japan. Jasdaq has still attracted the lion's share of IPOs and is perhaps not considered as risky as the two new markets because of its historically more stringent criteria.

In response to the competition from Mothers and Nasdaq Japan, however, Jasdaq has since relaxed its requirements and sped up the application process in order to appeal to venture companies. For example, it revised criteria under its Second Standard to allow loss-making companies to list. In doing so it has also started to improve disclosure by requesting quarterly reports and setting up a system for distribution of IR information.

Cybird Co., Ltd., Japan's top contents and solution provider for Internet-enabled mobile phones, was the second company after Goodwill Group to go public on the OTC market with a net loss. Cybird shares got off to a rocky start in trading but as of the end of March had settled above their initial offering price. Hiroshi Shigematsu, manager of investor relations, says Cybird chose to register on OTC rather than Mothers or Nasdaq Japan "because the OTC market is more established and more familiar than the others."

But perhaps for that same reason, other companies decided to list on the newer, more nimble markets.

Access Co., Ltd., a leading supplier of embedded browsers for non-PC devices such as i-mode phones, listed on Mothers this February, and its share price was sitting over 75 percent above its IPO price as of the end of March. President Toru Arakawa says, "When we decided to go public, there was the Second Standard on OTC for companies in the red, but in general OTC expects companies to be in the black. We needed to invest a lot to hire good engineers in order to keep up with the fast growing market, and we knew we had to be in the red for a while. At that time, Mothers had been established to nurture companies with growth potential and promising futures, so we chose to list on Mothers. Nasdaq Japan was about to be established but no details had been disclosed yet."

J-Stream Inc., Japan's leading Internet streaming integrator, postponed its IPO on Mothers last fall due to the worsening market conditions, but it also believes Mothers was a good fit. CFO Takeshi Sugai explains, "Companies listed on Mothers are mostly in the telecom and high-tech industries, whereas those on Nasdaq Japan are in a variety of industries. As we are a company specializing in streaming and thus fall under telecom and Internet, we think Mothers may suit us better."

Another company that postponed its IPO, but on Nasdaq Japan, due to market conditions is Net Village Co., Ltd., a provider of email and other services for mobile Internet phone users. CFO Hiroyuki Miura explains his company's reasons for choosing Nasdaq Japan: "We've already gone overseas, and if we are to make alliances with overseas companies and expand globally, we thought Nasdaq would be better because it's well known worldwide."

Nasdaq's global-mindedness also attracted Open Loop Inc., an information security technology developer. Open Loop's share price shot up over six-fold from its initial offering price in a month after its debut in early March. President and CEO Kazunori Asada believes that Nasdaq Japan has lived up to its promise of being a "free, fair, and global market." He says, "Even a venture company like ours can get a fair evaluation on fair corporate management and continuous growth under objective rules. Also when considering overseas expansion in the future, we believe listing on Nasdaq Japan would help us earn trust."

When asked about improvements that they would like to see, the venture companies expressed relatively minor concerns.

Net Village's Miura would like to see improvements in "liquidity and lead underwriters' selection of IPO companies" but also recognizes that "these are probably problems that have to be improved with the securities firms themselves rather than Nasdaq Japan."

J-Stream's Sugai fears that the markets may become too restrictive. He acknowledges, "This is not a problem with Mothers or Nasdaq, but probably the perspective of investors has changed. Or perhaps it's the result of securities firms becoming timid. J-Stream will make a debut as a profit-making company, but we hope Mothers and Nasdaq Japan will be markets that attract companies with growth potential even if they are in the red."

Access' Arakawa's comment was very specific. "We sell technology and need to set up press conferences to better demonstrate new products in addition to just sending out releases. We usually have to hold the conference on the same day as the release, in which case some industry reporters sometimes cannot make it. While we understand the importance of timeliness in the information that TSE requests, we would like to a have a one or two day window, since we think it would be a merit to allow as many reporters as possible to come and write."

Finally, reminding us that not everyone lives in Tokyo, Sapporo-based Open Loop's Asada says, "Nasdaq Japan often holds seminars about the stock markets or management, but we wish that they would also provide this information via email to companies based outside of Tokyo."

In general, the companies that went public or are about to go public on Mothers and Nasdaq Japan seem to believe that these two new markets have lived up to their expectations, as far as they are concerned, but that it may be too early to pass judgment.

GLOBAL TRADING
For foreign retail investors interested in Mothers and Nasdaq Japan issues, they are mostly inaccessible. Only Crayfish, one of the earlier listings on Mothers, has ADRs (American Depositary Receipts), ironically on the US Nasdaq market. But Crayfish has been slapped with a class-action lawsuit for allegedly failing to properly disclose the financial troubles of its principle shareholder and partner, Hikari Tsushin.

Nasdaq seeks to provide the world's first 24-hour global trading system, by linking up US Nasdaq, Nasdaq Japan, and Nasdaq Europe. Such a system, for example, would allow Japanese retail investors to trade popular US Nasdaq stocks, and foreign retail investors to trade some Nasdaq Japan stocks. Nasdaq hopes to launch such a system by 2002, but it still has to deal with differences in language, currency, time zones, and securities regulations. In the meantime, Nasdaq Japan is inviting foreign companies to list on its foreign section, scheduled to start trading in June. Some companies listed on the US Nasdaq, such as Applied Materials Inc., plan to list on Nasdaq Japan in order to raise their recognition internationally. In addition, local subsidiaries of Nasdaq monikers like Microsoft and Cisco are obvious candidates for the Nasdaq Japan market.

The Tokyo Stock Exchange questions whether there is really demand for global trading by individual investors. But it's hedging this guess by participating in discussions underway to explore the possibility of creating the Global Equity Market (GEM), a 10-bourse electronic network for 24-hour blue-chip trading, with NYSE at the hub. The TSE already operates a Foreign Section, but it has not gained much popularity because of high filing fees and other barriers such as Japanese-language reporting.

Both cooperation and competition between stock exchanges worldwide are intensifying. Besides each other, another competitor that Japan's exchanges are watching is ECNs (electronic communications networks), private systems for direct trading that eliminate the market-maker middlemen.

TIMES ARE A-CHANGIN'
Competition has helped spur the stock markets to make reforms that would have otherwise been left in complacency. But for capital markets, competition for competition's sake may not always be in the best interest of investors.

H&Q Asia Pacific's Sakai asks, "Does it make sense for Japan to have three markets that cater to emerging growth companies? I'm not sure that the market is robust enough to be able to accommodate three separate independent ex-changes. When it comes to exchanges, there are advantages of scale."

But with their differences in interests and opinions, it doesn't look like the markets will be merging anytime soon.

Under deregulation allowing exchanges to become for-profit entities, other Japanese exchanges are following in Nasdaq Japan Inc.'s footsteps in incorporating as for-profit companies in order to make themselves more efficient. A division of the JSDA was spun off as Jasdaq Market Inc. in February. The Tokyo Stock Exchange and Osaka Securities Exchange are also planning to incorporate and, like Nasdaq Japan Inc., to eventually go public. TSE and OSE were originally founded as for-profit companies in 1878 but were suspended during World War II and afterwards re-established in 1949 as nonprofit membership organizations.

When the stock exchanges become public companies themselves, we can hope they will practice what they preach in terms of corporate governance and investor relations. Stockhouse.com's Fuchs puts it more frankly, "Mothers and Nasdaq Japan should continue to attack the TSE for all its inbred bureaucracy and undiminished loyalties to interests of big business and friends over at the Ministry of Finance. There should never again be a TSE director who is a MOF amakudari." (Amakudari describes government officials who retire to cushy private positions, or literally "descend from heaven.")

For venture companies, the markets have provided a source of funding and publicity; for venture capitalists, an exit strategy; for securities firms, underwriting and brokerage commissions. For public investors? Well, they've been offered a wider selection of growth stocks, albeit often risky ones. But, like most everyone else, they have probably fallen victim to the overall bear markets.

Besides speeding up the IPO process, the easing of requirements has in turn brought greater attention to the importance of disclosure and transparency and emphasis on shareholder value. Aware-ness of investor relations and corporate governance issues are gradually heightening in Japan, thanks in part to the new markets. Seen in the context of broader Big Bang reforms of Japan's financial markets system, Mothers and Nasdaq Japan can be seen as a positive for investors despite the recent sea of red figures.

Augie Tam is the founder of GaijinInvestor.com. He can be reached at augietam@gaijininvestor.com.