(Bloomberg) -- An additional 30 minutes of trading at the Tokyo Stock Exchange may pit some investors against algorithm-driven funds seeking to capitalize on price-sensitive announcements to be made during extended hours.
The close for Asia’s second-biggest equities will be increased to 3:30 p.m. from Nov. 5. Of 800 companies that will post earnings after this date, more than 40% plan to report during the extended period, according to a survey by the exchange. That compares with less than 20% of total quarterly releases made during market hours last season.
This enhanced trading period is raising concerns among fundamental-based hedge funds and long-only investors who fear the shift will give rise to machine-driven price moves that don’t necessarily reflect the fair value of a company.
“It may be good for day traders and high frequency traders, but as a long-term investor we do not think the change is beneficial,” said Zuhair Khan, a fund manager at Union Bancaire Privee who has been following the market for more than two decades.
“We like to have time to review information such as earnings release data and hear the company’s explanation before making a decision,” Khan said. “We prefer the release to come out after hours and then to spend time on analysis before deciding our trade for the next day.”
The changes are unveiled as the Japan Exchange Group Inc., the Tokyo bourse operator, seeks to smoothen its operations and repair its global profile after it experienced an unprecedented, day-long halt to trading in 2020.
Chief Executive Officer Hiromi Yamaji said at a briefing this week in Tokyo that the exchange’s biggest priority was to strengthen its ability to recover from any potential systems crash.
“Algorithm trading may cause mispricing after earnings are released, but the Japanese market has high liquidity and can correct,” said Yamaji, adding that the trading time extension will help price discovery.
‘Like a Cheetah’
While the additional time will offer opportunities for day traders and hedge funds who are able to quickly act on earnings results, long-term institutional investors may miss out as they need to spend more time on decisions due to heavier accountability, experts said.
“Algorithm can move ahead much faster than human traders if there’s a surprise in earnings results,” said Takanori Adachi, a professor at Tokyo Metropolitan University, who worked on algorithm trading at Morgan Stanley for more than a decade. For humans, competing with algorithms “is like a cheetah joining a 100-meter race at the Olympics.”
Investors and analysts need sufficient time to digest corporate statements and feedback from conference calls to understand the nuance of earnings results, said Hiroaki Tomori, executive fund manager at Mitsubishi UFJ Asset Management Co. “If corporates want to be understood properly, more time is needed,” he added.
The extension worsens the middle-office working environment for brokerages and investment firms, and potentially affects staffing and hiring going forward, said Kenji Sugiyama, chief executive officer and chief investment officer at Bushido Asset Management, a hedge fund based in Tokyo.
“It’s difficult to find a benefit for the Japanese market overall,” he said.
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