To our share holders and customers:
The change of the government last year inspired the public’s expectation that this may be the chance for Japan to change. Considering that the new government has just started rolling out its new initiatives, we should refrain from expecting immediate results. The only thing that is certain is that politics can change only a fraction of the society.
About 30 years ago, professor Ezra Vogel of Harvard University published a book titled “Japan as No. 1”. The book suggested that the US, which was experiencing a lackluster economy at that time, should learn from Japan which was showing astounding economic growth post WWII. This period showed how outstanding Japan was. However, recently, people often said, “Japan which deluded itself in believing that it is the real No. 1 and became too confident, had been left behind by the rest of the world since 1990, as it rolled downhill. We call the following years as the lost two decades.”
It is often argued that politics should show the direction in which Japan should proceed, however I believe this is wrong. My belief is that society changes politics and not the other way around. Although it is called the lost two decades, I do not think that our country has not changed at all during these last 20 years. It is true that based on GDP per capita, Japan’s ranking has declined substantially, however GDP is just one aspect of affluence. The fact that today’s young people claim that “having a car is bothersome” can be taken as a sign that life in Japan has become affluent. I feel that the definition of affluence has clearly changed in the last two decades. The first step to initiating change is to notice that such signs can be observed everywhere.
There is a word that I learned from the late Josei Ito, ex-president and chairman of Nippon Life Insurance, who was also my senior at university. It is “Zabo”, a word of Zen, which means, “To embrace something new, whatever it is, you have to abandon old things. New things can only be absorbed when you have created vacancy. Therefore, do not hesitate to discard old things.” This idea may have something in common with Schumpeter’s idea of creative destruction.
I recently realized that out of the many things that I have initiated so far, those successful were related to the principle of “Zabo”. I have completely denied the past and discarded all the things that my father-in-law, ex-president of Matsui, had built-up. He just silently watched and never objected to what I did. The vacancy created by abolishing face-to-face based brokerage business was filled perfectly by our call-center based business which was a passive type of operation. It resulted in a 5-fold increase of our equity trading value which is directly linked to our revenues. Later on, the vacancy created by abandoning the call-center operation was filled by our online operation, the internet business which increased our business 60-fold. On the whole, our business increased 300-fold. The tremendous increase in business size was just a result that came afterwards. There is one thing I keep on saying to myself and to the employees, which is: “Let us stop just working hard. Please do not work so hard. Working hard only makes a little difference. Let us think hard to find a solution that enables us not to work so hard. Then, we will be rewarded with tremendous results that are worth several hundred-times over.”
Now, let us stop looking back to the past and start talking about the visions which are more important.
I would like to talk about the theme in which I am most interested nowadays. In recent years, I have been interested in and thinking about the changes in trading systems and how capital markets should function subsequently. Today, the capital markets are about to face tremendous changes that would be far beyond our imagination. The changes are not limited to a superficial level such as technological progress but are more far-reaching, to the extent that the capital market structure itself will change fundamentally. Discussions about face-to-face vs. online brokerage are things of the past. I started online trading which has no direct solicitation through sales representatives not because a useful tool, the internet, emerged, but rather because l thought that many of individual investors would like to have just execution of securities trading without any solicitation and then I felt the necessity to break-up the broking functions of securities companies upon deregulation.
This year, what we should focus on the most in the industry is the TSE’s next-generation trading system “arrowhead”. Compared to the old system, order-processing speed will increase 500-fold. This change is in line with global trends and should be welcomed accordingly. However, those who have waited for it the most may not be individual investors but the operators for PTS (Proprietary Trading System) and dark pool. They are operators of alternative markets who are aiming to take liquidity from the conventional securities exchanges, with the opportunities provided by the faster trading system of the exchanges. In such markets, stocks listed on the TSE will be traded at different prices. Such phenomenon is called “market disintegration”. In the US, market disintegration was accelerated by the institutionalization of investment. The progress of market disintegration makes it very difficult for individual investors to find optimal prices. Whereas institutional investors can greatly benefit from it given their large size of AUM, diversified information sources, and well-developed trading infrastructure. Mayday (May 1, 1975, the deregulation of capital markets in the US) tends to draw attention to the deregulation of stock brokerage commissions. However, its essential objective was to address market disintegration. Furthermore, it aimed to secure the best execution obligation. Situations in the US and Japan are completely different. The US has been seeking for more than a quarter of a century for a system capable of securing the best execution obligation. On the other hand, due to the exchange market concentration rule which existed until ten years ago, there had been no chance for market disintegration to occur at all in Japan. Structural changes to capital markets in Japan are expected to progress in close association with this market disintegration issue.
Expansion of new financial products cannot be ignored either especially with participants in CFD trading increasing these days. In CFD trading, only the difference from offsetting transactions is settled and it is done without physical delivery of shares. From a different viewpoint, this could be seen as market disintegration at another level, one which occurs between spot and CFD trading. While financial authorities are tightening rules for protecting investors, which I think is quite a natural response by the authorities, restrictions are currently limited to rules on leverage and solicitation. If gray zones are left uncontrolled and the best execution obligation is not secured, individual investors will be seriously disadvantaged.
10 years have passed since the Japanese financial Big Bang. Since then, misconducts by those who slipped through the regulations and played the financial markets have hurt investors, especially individual investors. Even though this may have been an inevitable by-product in carrying out the Big Bang reforms, it is unforgivable. As one of the market operators, I deeply regret having done nothing to address the matter. Therefore, we have the responsibility to contribute in eliminating the causes of such issues in the future. We expect drastic changes to continue in the capital markets going forward, however we should not overlook the essence. Excessive fee competition and rash diversification of business have changed the earnings structure of securities companies. Some companies are expected to set up hidden pitfalls in the field of faster processing of transactions or complex financial products that will be quite difficult for individual investors to understand. Therefore, we should keep a close eye on how retail brokers earn their profits. For example, we should question the meaning of trading revenues derived from transactions hidden behind the mask of being bilateral transactions while offering unfavorable prices to individual customers.
Matsui Securities has stuck to the policy “we do not engage in unsavory businesses at all”. We believe that we have managed to survive over 90 years because we have followed this policy. The reason why we have limited our investment trust sales business to ETF products is because it is impossible to provide customers the consulting services through the internet. We also do not engage in proprietary trading to avoid conflict of interests. I believe that, what matters is “what we do not do, rather than what we do”. Moreover, I firmly believe that “avoidance” and “discard” are the keys for creating real innovations.
Matsui Securities is still a tiny securities company. However, our net assets, which we have built-up over the past 90 years, are approximately equal to 10 years of fixed costs including personnel costs. We have improved our financial and business position allowing us to be profitable even if transaction volumes should be half of the current low levels. Now we are ready to prove to the public whether we have the “small head but great wit”. We will do our best. We look forward to your continued support of Matsui Securities for this year.
President & CEO
Matsui Securities Co.,Ltd.