Money managers outside of Japan are shunning Japan's version of the Nikkei 225 stock index futures contract in favor of contracts with lower costs and less burdensome trading requirements.
Trading volume on the Nikkei 225 on the Osaka Stock Exchange fell 33% this year through Sept. 30, with 4.527 million contracts changing hands vs. 6.707 million traded for the same period last year.
And while some of that drop might be attributed to the increased use of a contract on a new Japanese stock index, the Nikkei 300, industry experts said greater costs in Japan are allowing other exchanges to grab market share. The Singapore International Monetary Exchange Ltd. has latched on to a significant amount of the volume in Japanese stock index futures and is particularly attractive to non-Japanese investors.
Jeremy Dyer, a fund manager for Scottish Amicable Investment Managers Ltd., Glasgow, Scotland, said managers traditionally traded Nikkei 225 futures in Osaka. But a significant cost difference between Osaka and Singapore contracts allowed the SIMEX to take volume.
Nikkei 225 contract volume on the SIMEX rose 25% to 4.376 million for the nine months through September from 3.496 million for the same period, according to the Futures Industry Association, Washington.
First Quadrant Corp., Pasadena, Calif., has used contracts on all three indexes - the Nikkei 225, the Nikkei 300 and the TOPIX, said Mary Ellen Sherry, global trader.
The TOPIX is a Japanese stock index futures contract that targets a smaller segment of the stock market than the Nikkei 225 and Nikkei 300 indexes do. The TOPIX is comparable to the Russell 2000 stock index in the United States, Mr. Dyer said.
More recently, First Quadrant has traded the Nikkei 300 in Osaka because the index itself better matches the money manager's benchmark, the Morgan Stanley Capital International Japan Index. But when trading the Nikkei 225, First Quadrant has generally preferred the SIMEX version because of the lower costs.
A recent informal comparison of trading costs on the Japanese index contracts in Osaka, Singapore and Chicago, show the Osaka costs to be the most expensive, Mr. Dyer said. It cost about $6,276 in Osaka to trade $7.9 million of index exposure. The cost was just $897 and $813 for contracts traded on the SIMEX and the Chicago Mercantile Exchange respectively.
Mr. Dyer said current users of Osaka contracts are mainly Japanese-based investors who use the contract both out of loyalty to Japan and because they trade in large enough blocks to gain volume discounts. Investors outside of Japan generally don't trade in Nikkei 225 futures contracts in large enough volume to get commission breaks available to big users of Osaka contracts, he said.
The SIMEX's contract is easier to use and cheaper, he said. His firm tends to use the SIMEX.
In Chicago, the Chicago Mercantile Exchange's dollar-denominated contract on the Nikkei 225 also has had a large increase in volume. The CME contract is different from Osaka and SIMEX contracts because it is denominated in U.S. dollars so currency fluctuations between the dollar and the yen won't affect the value, said Rick Redding, vice president of index products at the CME. The contract value is calculated by multiplying $5 times the index value, rather than a yen value times the index.
Volume has "really gotten a lot better" for the CME's contract, said Mr. Dyer. Scottish Amicable recently placed some trades through the CME without affecting the market price, although the trades were placed gradually over a period of days, he said.
Mr. Redding noted trading the newer Nikkei 300 index has not really taken off in Japan as some expected. The Nikkei 300 is a market-capitalization weighted index, like the Standard & Poor's 500 Stock Index, while the Nikkei 225 is price weighted, like the Dow Jones Industrial Average.
Ms. Sherry of First Quadrant said: "We have been disappointed with the volume drop-off in the 300, frankly, though all the volumes have sort of declined in the Japanese (stock index futures) market with the (cash) market coming down recently."
Ms. Sherry noted that when the Nikkei 300 index began trading, open interest was about 300,000 contracts. More recently, it has been closer to 120,000 contracts. Open interest is the number of contract agreements outstanding at a point in time.
Since Osaka's Nikkei 300 futures contract began trading in February, volume totaled 3.538 million contracts through September, according to the FIA.
Mr. Dyer agreed the Nikkei 300 hasn't taken over yet as the leading Japanese futures contract but "it probably will," given investors' preference for market-weighted indexes. Both the SIMEX and the CME purchased licensing agreements for the Nikkei 300, and both could introduce contracts sometime next year, Mr. Redding said.
The Tokyo Stock Exchange, has seen growth in contracts on the TOPIX. Futures volume on the TOPIX rose 55% to 2.125 million contracts for the nine months through September from the 1.375 million contracts traded for the same period last year.