Nasdaq Japan 1 Case 1-2 NASDAQ Japan

Nasdaq Japan2 The Players l NASDAQ l Softbank Corporation l Osaka Stock Exchange (OSE) l Three limited partners l 10 strategic investors l Indigo Markets

Nasdaq Japan3 The Business Goal l Japanese stock market planned to become the link to allow 24-hour trading in combination with NASDAQs around the world l Global standards to be applied l Do the benefits outweigh the costs?

Nasdaq Japan4 The Plan l To shift the financial assets of Japanese investors from safe low growth categories (80% is in cash, savings, insurance) to more high risk and high growth equity markets (currently only 5%). l An efficient, transparent global market would enable Japanese investors to move more of their personal wealth outside the country– much riskier

Nasdaq Japan5 The Environment l Existing Japanese stock exchanges use an Auction securities model that does not perform efficiently enough to network with other country’s stock exchange systems. l A hybrid market model is proposed to ease the change

Nasdaq Japan6 The Issues l What kind of market is this? l What role does culture play? l How should the business be structured? l Technology: build or buy? l Support systems: own, rent, outsource? l Can the US model work in Japan?

Nasdaq Japan7 Basic Market Model Buyer SellerBuyer Seller Market Intermediation services arise as needed; fees arise from services

Nasdaq Japan8 Auction Market Model Buyer Seller Market conducts auction Fees arise from auction services Can be completely automated

Nasdaq Japan9 NASDAQ US Model Entrepre- neurship Listing Market- Making Clearing/ Settling Fin’l Mgmt NASDAQ Issuers Issuer Support Service Providers Investors Investor Support Service Providers Market Makers Regu- lators Settlement Agents

Nasdaq Japan10 Hybrid Market Model Buyer Seller Market maker buys and sells as principal Profit is made on difference between buy and sell prices; fees may also be earned for services

Nasdaq Japan11 A Bit of Chronology l June 1999-JV signed between NASDAQ and Softbank Corp l October NASDAQ Japan Club l April 2000-Agreement signed with OSE l June 19, 2000-Initial launch of NJI l June 19, 2001-Beta version of hybrid model running on NJ servers

Nasdaq Japan12 A New Market Model l Improvements in Phase 2 over Phase 1 l Change of Market Model l Indigo market l Network l Implementation of ATM (Asynchronous Transfer Mode) in addition to TCP/IP (Real time)

Nasdaq Japan13 Technology Architecture Network Data Center Trading Engine Regulatory System J-Net Disclosure Clearance Settlement Market Data Website Corporate Member Firm

Nasdaq Japan14 Technology Changes l Changes in Phase 2 from Phase 1 l Data center l Moved from Osaka to Tokyo l Managed by NJI (was managed by OSE) l Trading Engine & Regulatory Systems l Operated by NJI (was operated by OSE) l Networks l Managed by NJI (was managed by OSE)

Nasdaq Japan15 Analysis-1 l NASDAQ and NJI tried create a market that would totally transform the Japanese way of thinking. l Because they wanted to do this quickly they worked with established Japanese Corporations l For example Softbank and OSE. l Most other corporations acted as limited partners or strategic investors.

Nasdaq Japan16 Analysis-2 l The end result was an extremely complicated entity and this complexity could have contributed to their demise. l Another issue was the decline in the economy in both Japan and the U.S. that started in early 2001 l The company is running out of cash

Nasdaq Japan17 Question 1 How did market structure and relationships change with the introduction of the NASDAQ Japan Market in June 2000?

Nasdaq Japan18 Question 2 What impact will the launch of the NJM hybrid market model have on market structure and relationships in Japan?

Nasdaq Japan19 Question 3 What are the strengths and weaknesses of the approach that has been taken to building a global securities market? Would you have done anything differently?

Nasdaq Japan20 Question 4 What challenges do NASDAQ Japan executives face in the summer of 2001? What advice would you give?

Nasdaq Japan21 Prescription l The goals of NJI were too aggressive for the conservative Japanese market; technology might not be so portable after all. l Plan to introduce the Phase II model gradually over a period of time instead of having to compromise with two tiered system l Raise awareness of technology.

Nasdaq Japan22 Outcome l Announced end of joint venture August 16, l Alliance ended on October 15, l NASDAQ wrote off 20 million dollars. Lost money for two years and U.S. exchange did not predict that would change. l Softbank had to add 1.7 billion dollars to its growing list of failed investments