* Market makers, overhauled system to start operating on Mon
* TSE eyes online brokers to attract retail participation
By Aiko Hayashi
TOKYO, Oct 2 (Reuters) - The Tokyo Stock Exchange, Asia's biggest bourse by market capitalisation, is revamping trade in stock options to boost liquidity and keep its ranking as it faces rising competition from regional rivals in Hong Kong and India.
With 88,256 contracts traded in 2008, the volume of stock options on the TSE lags the Chicago Board Options Exchange, the International Securities Exchange, as well as the exchange in Hong Kong and India's National Stock Exchange, according to TSE data.
"Increased volume in options trading means larger volume for cash trading. That will lead to a bigger market as a whole," Masashi Sekizawa, a director of derivatives at the TSE, told Reuters in an interview on Friday.
"Considering the size of the Japanese market compared to places like India, options trading should be growing more here. The problem is liquidity."
The Tokyo exchange, which is the second largest in the world by domestic market cap, began options trading in 1997. It kicks off the revamp on Monday, introducing market makers, including UBS Securities and Mitsubishi UFJ Securities, to secure liquidity and will start using a faster, more powerful trading system.
The overhaul covers options in stocks, including some exchange-traded funds, the Topix index and JGB futures.
Market making will initially be in options on stocks which make up the Topix Core 30 blue-chips, including such companies as Mizuho Financial Group and Canon Inc.
To help boost liquidity, the bourse hopes to attract more retail investors to make options a regular investment choice.
"Our hope is that it would become normal for individual investors to buy options and cash on stocks as a pair, so that even if a cash price goes down, they don't have to rush to sell," Sekizawa said.
"Once there's liquidity, options trading could work to make overall market moves less bumpy."
Retail investors accounted for 42 percent of trading volume in options on stocks in the first half of this year, according to TSE data. That compares with 49.1 percent for brokerages.
"We are actively talking to online brokerages so that individual investors could eventually trade TSE's options online," said Masanori Onda, a senior manager of derivatives at the TSE.
Traders said retail investors were likely to be the main players in the options market as institutional investors often use derivatives known as contracts for difference (CFDs).
"It's unclear how much institutional investors will use this options trading on individual stocks on the bourse as many overseas brokers use CFDs," said one derivatives trader at a European brokerage, who could not be named as he is not authorised to speak to the press.
"Highly skilled individual investors will likely participate." (Additional reporting by Fumiya Mizuno; Editing by Joseph Radford)