Over the years, the world has witnessed major breakthroughs in business operations with accelerating capital outflow patterns symbolizing the increasing emergence of the advanced countries of economic prosperity. On a broader scale, interconnectedness of world nations has significantly globalized capital flow in the interlinked operations where each nation has intensified efforts to withstand domestic challenges by improving economies. For instance, the flee-flowing capital, borderless business operations, and increasing remittance from citizens living in Diaspora are some of the set of factors intensifying competition and reshaping the global stock market. With the business mind-set today, domestic stock exchanges are rapidly revolutionizing to take advantage of global opportunities arising in the interconnected environment to pursue new foreign listings or accessing foreign markets through mergers, acquisitions and strategic alliances (Ernst & Young, 2012). Nevertheless, the market visibility across various stock exchanges differs with features and mode of operations characterizing different stock markets.
As more companies go public, stock market reports are ideal in providing fact-based comparative information to existing and potential investors of the overall market and respective company performance. In particular, the market index and overall capitalization are key indicative tools of economic growth, suppression on market stability and anticipated companies’ performances. For too long, accessing foreign stock markets seemed difficult with the exceedingly lengthy execution of investor’s orders. Consequently, this forced most companies stick to domestic listings. However, with the recent technological innovations, investing in stock markets has accelerated the business leaders to accustom to listing beyond the home market. Among other things, a company selecting which market to list their shares considers exchange’s prestige, institutional investor base, listing costs, regulatory requirements, technology, stock market performance and company’s targeted markets (Ernst & Young, 2012). Additionally, with the recent technological innovations, investing in foreign stock markets is gaining accelerating attention with the new features of technology easing the accessibility concerns and speed of execution. Nevertheless, a significant number of companies still find it suitable listing in the domestic exchanges. Consequently, the spreading deregulation and liberalization of protected stock markets, increasing globalization pressure, and desire of cross-border investments are influencing factors for investors locating exchange markets which best satisfy their investment desires.
Kuwait Stock Exchange Market
Despite the existence of holding companies in the oil-rich nation dating back to 1952, the inception of establishing stock market emerged after 1962, following the assent of the law seeking to organize the stock market. Nevertheless, the foundation of the now most appealing stock markets in the Persian Gulf arose in August 1983 following the Amiri decree establishing Kuwait Stock market as the first in the gulf region for trading securities (International Business Publications, 2012). At the time of formation, the decree stated the market objectives as serving the nation to improve the economic growth, facilitating realization of state policies on economic matters and routing the development path for others to follow. Similarly, the decree mandated the KSE to rationalize security exchange techniques to foster financial investment safety and accuracy of transactions.
Prior to the formation of KSE, the Kuwait nationals mildly acquainted to ownership of shares following the formation of the State National Bank and Cinema Company in succession. Within the transformation of the nation from a traditional-based economy to an oil-dependent economy, stock exchange deals were settled in brokerage offices and public cafes, with each broker acting as an individual market (International Business Publications, 2012). It is important to point out that trading with shares lacked organized patterns and resembled over-the-counter deals, where securities were traded depending on investors demand. However, with the influx of capital inflow into the economy widening, it overwhelmed the capability of the economy to absorb accumulating surplus prompting regulation of trading in shares.
Ideally, the birth of KSE transformed with the setting of an overseer committee meant to design frameworks for stock exchange activities while preserving the nation’s economic interests. Besides, the transformation saw the application of ministerial resolutions before the official opening in 1977. The Amiri Decree formed an executive administration establishing KSE as an independent financial institution under the committee whose eleven members were drawn from commerce and industry ministry, the central bank, Kuwait chamber of commerce, minister’s appointees and an independent director general (International Business Publications, 2012).
Contemporary operations in the KSE are tailored to provide financial and investment services both to the investors and the protection of the economic interest. Firstly, KSE has the judicial independence in nationalizing dealings in financial instruments and eliminating potential confusion in transactions. Secondly, KSE participation in the security dealings provides coordination and integrating financial and economic functions into the development path to securing the country’s stability. Lastly, the stock exchange market is mandated to protect investors’ funds through its supervisory role to sustain accuracy, professionalism and efficiency during transactions. Following the reorganization of the stock exchange, the central bank has annexed public debt financial instruments, mutual funds and a forward dealing system to diversify investment besides the customary shares.
Japan Stock Markets
Contrary to the KSE history, Japan stock market involves a success story of a stock market established within the fourth quarter of the 19th century. Although the account of Tokyo stock market began at such early, it collapsed during the 1940s only for it to get on after the World War II at a slower rate. However, with hostility levels quelling back to normal atmosphere, eight exchange markets were operating towards the middle of the 20th century. Over the years, Japan stock exchange developed to host Tokyo and Osaka among the largest stock markets in the world by 2004. Nevertheless, the Japan Stock market has witnessed the transformation under multiple mergers with the latest being authorized by the Financial Services Agency (FSA) for the Osaka Securities Exchange Co. Ltd and Tokyo stock Exchange Group Inc. merge as Japan exchange Group, Inc. (JPXG) (Financial Services Agency, 2012). Despite the multiple transformations to the current Japan stock markets, TSE has served primarily as the central market since its inception, accounting for over 95% of the total value of all stock trading on domestic stock exchanges (Tokyo Stock Exchange Group, Inc, 2008).
Majorly, TSE emerged as the dominant market in the world financial markets with its range of services stretching beyond the domestic stock market. In particular, it provides markets for derivatives products such as Japanese government bond futures and TOPIX futures besides clearing and settlement services (Tokyo Stock Exchange Group, Inc, 2008). Tirelessly, TSE has managed to withstand the 1990’s repression by sustaining liquidity, integrity, and diversity for both domestic and foreign investors. Similarly, the transformational path has seen the revamping of its corporate arrangement to foster its independence, effectiveness and self-regulatory features to enhance flexibility suitable for international operations. Consequently, TSE established the holding company, TSE group Inc. and TSE regulation which later conducted market operations under the umbrella of TSE Group, Inc. (Tokyo Stock Exchange Group, Inc, 2008).
For a long time, Japan operates a free market economy translating into rampant growth since the end of Second World War. The strong presence of such growth is TSE among the largest stock markets facilitating securities exchange. Majorly, the market provides a market place for the securities, supervision of trading activities, listing securities and monitoring the listed securities. However, despite the dominance by TSE, the Japan stock market existswith a number of trading platforms including Osaka Stock Exchange (OSE), the Nagoya Stock Exchange, the Fukuoka Stock Exchange, and the Sapporo Stock Exchange (IMF, 2012). Ordinarily, TSE operates in two sessions where the morning activities begin at 9.00 am till 11.30 and the afternoon session stretching from 12.30pm till 3.0 pm. The market operates in a three-tier section comprising: first section of large companies, second section for mid-sized companies and the mothers section for high-growth start-up companies (Seubert, 2007). Successively, application of technological advancements in the market has eased the system failures and accuracy errors and subsequently increased ordering capacity to avoid past interruptions owing to technological issues and typing errors eroding the investors’ confidence ( Practical Law , 2009).
Differences between Kuwait Security Exchange and Japan Stock Markets
Firstly, the different modes of operation between the two arise from the nature in which the two were established. KSE began to form of an incorporated association established by an Amiri decree and is yet to encounter privatization. Essentially, after attracting foreign capital policy was incorporated into its objectives allowing citizens of Gulf cooperation Council to own up to 40% of Kuwaiti Companies, the Kuwait government plans to privatize the sector to enhance the market potential and accelerate growth (International Business Publications, 2012). On the other hand, the Japan Stock market has seen multiple mergers after restructuring of a listed stock company distinct from the previous form of an incorporated association. For instance, the Japan system reveals multiple changes to the structure in the last decade such as the 2001 demutualization of stock exchange into TSE, Inc. and establishment of TSE group, Inc. in 2007 comprising a market operation company and a TSE regulation, to cement independency and effectiveness (Tokyo Stock Exchange Group, Inc, 2008).
On the other hand, the financial instruments traded on this exchange market and governing laws have drastically changed to alter the daily transactions differently in the two stock markets. Particularly, the Japanese economy has recorded consecutive cycles of growth with its increasing export market. Consequently, it has been essential to compile support and protection rules where investors’ confidence is governed under cross-sectional legislative frameworks such as the securities and investment service. This prompted the change of the scope of securities and derivative transactions. For instance, the scope of instruments covered under the financial and exchange law lists all types of bonds, interests and investment in trusts as comprehensive securities while derivative transactions cover currency and interest swaps, weather derivatives, credit derivatives, securities derivatives and indexes (FSA, 2006).
Regulation of the stock market is essential to restore investors’ confidence in the market by reviving value and transparency. In practice, KSE is sealing the regulatory gaps and overlaps in the prior system under one roof of regulation to spur market growth in investment and asset management (Oxford Business Group, 2012). This has forced listed companies revisit their funding structures contrary to the previous regulatory regime. As a result, the new requirements by the CMA is generating short-term challenges widely felt by smaller firms with a predominantly local focus as the firmer provisions impose maximum exposure limits in each equity to 10% of the fund’s net value. Contrariwise, the Japan three-sectioned market presents a different trajectory growth incorporating first covering large companies, second for the medium-sized and mother phase for the start up in security investment to allow comprehensive growth. Consequently, the mothers section has proclaimed as the fairest, most liquid, and the fastest growing market in Japan (Seubert, 2007). Similarly, while Japan seeks to foster the attractiveness of the stock exchange in the international arena through protection of the investors through new legislative frameworks, Kuwait has prioritized the establishment of the Capital Markets Authority to replace existing administrative bodies under the principle of integrated oversight (Oxford Business Group, 2012).
Conducting business in the information age demands application of technologies to enforce accuracy, speed and improve productivity. For instance, in the wake of the transformation of economies from traditional practices to technology-based operations, withstanding high processing demands and multiple functionalities requires modernizing the trading system. Installing the new trading system X-stream in KSE offers multiple functionalities and flexibility by eliminating the board lots and odd-lot market featured in the KATS system, since investors can now apply various time spans simultaneously with increased order quantity (Kuwait Stock Exchange, 2012). Alike other markets, modernizing the KSE have enhanced execution of the forward markets transaction at the optimum prices rather than the pre-existing broker-determined prices. In addition, KSE technology partnerships with NASDAQ OMX seek to deliver trading surveillance and market data while providing strategic advisory services under a new electronic trading platform for equities, bonds and derivatives (GlobeNewswire, 20O9).
On the other hand, application of technology in Japan stock system is unmatched after learning about the botched costs associated with system errors arising in derivative transactions. The vulnerability of global markets to computer malfunctions prompted the implementation of the remote trading participant system which allows foreign security firms trade despite their distanced location from Tokyo exchange headquarters ( Practical Law , 2009). Contrary to the KSE technology partnership to enhance market pricing, surveillance on the domestic market, application of technology the remote trading system in Japan seek to improve their international competitiveness against rival foreign exchanges.
Following the global financial crisis that affected nearly creeping all financial systems across the world around 2007-2008periods, regulatory authorities have emphasized approaches to re-investigate policies guiding the stock market operations. An overview of the Kuwait investment sector reveals the vulnerabilities of the existing approaches to withstand adverse crisis. For instance, prior to the establishment of the CMA, supervision of the brokers and stock agents alongside licensing was ineffective. Consequently, upgrading regulation in the investment sector was inevitable to attain international standards. However, the KSE suffers from lacking prudential regulation to protect investment in the undifferentiated institutions. Unlike the Japan stock system where proper segregation on the basis of risk profiles, the KSE regulatory framework lacks sectional distinction making it a burden for supervisors and opportunities for regulatory arbitrage (International Monetary Fund, 2010).
Imposing the minimum requirement barriers as the prudent policy to withstand investment risks is generating consequential results for market participants. Comprehensively, the KD 15 million capital requirement as the entry barrier poses consequential liquidity and leverage risks spreading across the sector. Typically, leverage mismatches in the Kuwait sector poses a systematic risk given the diversities of the Kuwait investment companies in short-term debts and illiquid assets which may fail to withstand crisis in the collective herd-like behavior (International Monetary Fund, 2010). With the recent global crisis affecting most capital markets, operational resilience is essential given the slow recovery pace in KSE prices. However, under the regulation of CMA law, KSE governance is emphasizing price discovery functions and institutional stability embedded in the law guarding against manipulation of the structure. Conversely, the Japan Stock system has crafted stricter registration regulation for exchanges and proprietary trading activities to inculcate resilience of operations. The regulation and supervision duties rest on FSA agency, SESC and CPAOB boards with delegated authority to protect issuing of securities and comprehensive public schemes (IMF, 2012). Under this approach FSA registers financial institutions to conduct consolidated supervisory for companies with an asset value beyond the Yen 1 trillion mark. Contrary to the KSE where a collective herd-like regulation exists, the Japan stock market maintains two types of regulated markets; exchanges and proprietary trading facilities (PTS) (IMF, 2012).
Lastly, the economic performance of the two stock markets indicates a trend of trajectory growth though with varying performance owing to the individual market structure. Although Kuwait majorly depends on oil exports, the KSE market capitalization as of FY2010 stood at KWD 36.3 bn (US 130.6 bn); with a listing of over 215 companies spanning across 10 sectors including services- 61, investment 52 while real estate and industries have 18.0% and 13.0% (Abotalaf & Palejwala, 2011). In contrast, the Japan market structure comprises a developed system with a listing of 2900 companies and a market capitalization of US $ 3 634 790 million, dominated by industrial and consumer goods companies (IMF, 2012). Additionally, despite the KSE introducing improved financial securities while incorporating foreign investors and stock markets into partnership, the high performance in the Tokyo market demonstrates a complex structure developed through alliances with leading stock markets. For instance, Tokyo and London joint venture in Tokyo AIM focuses on equity market for growing companies open to professional investors (IMF, 2012).
Contemporary global financial systems are gradually shifting from traditional approaches to technology-based operations. However, despite embracing similar practices, there exist distinct features owing to the fundamental frameworks guiding their key structures and operations. Such is the account outlined above in the Kuwait and Japan Stock Market operations and structures. This arises from the basic regulations guiding their objectives and market structures.
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