After two years in the doldrums the Japanese equity derivatives market started to perform again in the second half of the year and the major houses reacted by reorganizing desks, hiring staffers and offering new products.
Trading volumes continued to slump in the first half of the year and after nearly two years of poor performance several houses, such as ABN AMRO (DW, 7/20), cut staff or, in the case of Merrill Lynch, moved traders to Hong Kong (DW, 1/19). The low volumes were a result of record lows in the Nikkei 225 and option volatility, according to Kin Cheung, head of equity derivatives trading at Bear Stearns in Tokyo.
The second half of the year, however, was a different story. Richard Samuelson, head of Japanese equities at UBS in Tokyo, described it as "A tale of two halves."
The turning point seemed to be the government bail out of Resona Bank, in May. This improved sentiment and subsequently interest in Japan's equities returned. Over-the-counter derivative volumes jumped 30% in the next two months (DW, 7/15). Much of the turnaround on the derivatives side was attributed to the return of offshore hedge funds. "A lot of fund managers seemed to be caught underweight," said Bear Stearns' Cheung. As a result, options offering upside exposure took off, along with index-linked exchangeable bonds. "We've seen multiples of growth in some products," said Jeremy Kloiser-Jones, head of structured equity derivative sales at Lehman Brothers in Tokyo.
The resulting boom in customer demand breathed life into the Tokyo market and attracted new entrants such as TD Securities (DW, 6/20) and the setting up of a mega-hedge fund in Japan, dubbed Triloka Capital (DW, 6/22). Firms began reassessing the market and hiring staff. Later in the year Merrill brought back its equity derivatives traders to Tokyo and restructured its team (DW, 10/19). Growing client interest also prompted JPMorgan to set up an equity/credit hybrid desk (DW, 11/16).
