The Japanese Brokerage Industry – Adapt Or Die
The Japanese have one of the largest and most diverse brokerage industries in the world. Brokerages in this market mean everything from some of the world’s largest banks to provincial specialists with just a few employees operating out of a single office.
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Q2 2020 hedge fund letters, conferences and more
Competition In The Japanese Brokerage Industry
As every one of these brokerages is competing for the same market share, expectations on all of these different actors are evolving. For most, this means the expectations are higher. New market entrants (and a relatively static market size) means intense competition, and business threats for entrenched players. Online brokers are pushing down fees for retail customers while offering fancy interfaces and better customer service – behavior that is spilling over into the institutional side of the market.
Bronte Capital’s Amalthea Fund commentary for the second quarter ended June 30, 2020. Q2 2020 hedge fund letters, conferences and more The fund was down by 4.84% in June whereas the globally diversified MSCI ACWI index (in $A) fell by 0.53%. Over the course of the last financial year Amalthea grew by 16.46%, outpacing the Read More
Japan also has one of the world’s oldest populations, the consequence of decades of a low birth rate and excellent health care. However, even if they stay active longer than in other countries, older parts of the population eventually stop active trading. Increasing numbers of people in their 60s, 70s and 80s, are leaving the business, and they often leave behind brokerage relationships that span across decades.
These customers aren’t easily replaced by the brokerages they leave behind. These institutions are scattered around the country, often with a handful of offices in a single prefecture. They rely on phone trading, which tends to have high costs involved with maintaining physical infrastructure and a sales team. Technology is often basic, and sometimes decades behind large institutions. Unlike the country’s dependence on the fax machine, this can mean real challenges for the system. That said, upgrading also brings large costs, especially as a percentage of revenue for a smaller firm, and an investment of time.
For these companies the choice is either evolve or die. That may mean an acquisition or investment to supply execution on par with larger institutions and to attract a new client base. Moving into institutional trading is often an impossibility, because larger investors need robust regulatory access to small/mid cap stocks and research capabilities. These institutions also are likely to prefer firms with long standing relationships and well known brand names. While there might be some headway for larger regional brokers, most institutions need a major overhaul to adapt to the needs of tomorrow’s trader.
There are two major approaches Japanese firms can take towards reform.
Develop In-House Trading Capabilities
Trading firms can develop their own trading systems to meet current demand. This is the approach taken by many online brokers, which operate as technology companies first and financial companies second. This option can lead to the creation of some very special & state of the art kit, but it also is time consuming and costly. Some online brokers are straining to meet continued demand for additional development or features in the markets. Legacy companies can be uncertain about the time and capital requirements to create a system from scratch.
Bring In Outside Help
Regional and local brokers need a vendor with Japanese language solutions. While this eliminates some of the largest international vendors, it is no longer a major roadblock. More companies with knowledge of both the unique requirements of the Japanese market and state-of-the-art technology projects are available to guide institutions through the modernization process. Shared development costs and access to a completed solution means that this route frequently means more change at a lower price. An outside partner can also help firms move away from a single system provider for the entire system – which places outside risk on a single point of failure.
Hundreds of brokers across Japan are facing a choice – either continue to serve a shrinking market, or boldly move in the future. The choices they make will have impacts on their business trajectory in the years and decades to come. Technology is the only way brokers of all sizes make the changes they need to attract and retain a new client base that ensures business continuity.