After years of lagging behind Europe and the US in electronic trading, electronic changes are afoot in Japan’s financial industry, and they are making industry players focus more and more on the importance of networks and efficiency.
The most striking electronic advance in recent years has been the Tokyo Stock Exchange’s Arrowhead upgrade, a next-generation trading system launched in January 2010 to accelerate the TSE’s order response and information distribution speeds.
Arrowhead’s introduction has brought an increase in volumes and reduced order sizes. It has also played a part in accelerating the adoption of new technologies and new revenue opportunities; in particular buy-side investors embracing technology such as algorithmic trading, complex event processing (CEP) and smart order routing (SOR).
Not that Japan’s electronic revolution begins and ends with Arrowhead. The Osaka Securities Exchange in February launched J Gate, a new derivatives trading system, while seven months before Arrowhead, the Tokyo Commodity Exchange (TOCOM) launched its own electronic trading system.
And there have been structural advances too, notably the Commodity Derivatives Act (CDA) coming into force in January with the objective of improving Japanese commodity derivatives trading competitiveness on domestic exchanges, overseas exchanges and OTC products, as well as the Japan Securities Clearing Corporation (JSCC) having begun clearing trades for proprietary trading systems.
So what’s all this got to do with networks and efficiency? Well, that was part of the focus of the first of SunGard’s Trading Summit series in Tokyo, held in June with the participation of some of the leading players in Tokyo’s electronic trading world.
Take the adoption of co-location to gain an edge in formulating profitable trading strategies: something firms on the cutting-edge have been doing in Tokyo to great effect.
Such firms, says panelist Miyuki Suzuki, vice chairman & representative director of information platform provider KVH, are characteristically conscious of two primary things. First, location: which exchanges they need to be close to, which counterparties they need to be close to and which data feeds they need to help make the decisions, execute the trades and get the best price; and secondly, network quality and how to get the best connectivity.
“Obviously, with physics you are never going to get faster than the speed of light through fiber, but you want to get as close to that as possible if you are a high-frequency trader. The high-frequency traders that we have co-locating with us or using our proximity services and connectivity are very keen to move small op trades as fast as possible and get to the best price, at the best exchange, offering the best terms,” says Suzuki.
“We’ve also noted that co-location with an exchange is very important if you want to trade specifically on that exchange and are interested in the instruments that exchange offers. However, proximity, where you have the shortest time possible to as many different venues as possible is an important strategy for those who want to leverage the growing trend in fragmentation and SOR.”
The takeaway: the better the utilization and quality of networks, the more efficient and better the trade.
Not that networks and efficiency were the only keywords to come out of the panel discussion. Transparency too has become a keyword in the Japan’s new e-world, especially with increasing fragmentation and venues such as Chi-X and Japan Next growing their shares of what panel moderator Steve Edge, principal of AsiaEtrading.com, called the “execution pie”.
Fears that fragmentation coupled with a lack of transparency could bring about a Japanese version of the Flash Crash are understandable, but there seems to be confidence within Japan’s financial industry that Japan will be able to protect its markets against this possibility, as panelist Yasuo Hamakake, Chi-X Japan’s CTO, explains.
“Fragmentation isn’t a problem; Japan has a highly transparent market, and we also have the opportunity to learn the positives and negatives [of fragmentation] from other markets, so can apply that too,” he says.
That was a thought echoed by fellow panelist Eitaro Nakagawa, Executive Account Manager for Market Business Development at the Tokyo Stock Exchange. “If (like the American market) the market grows as a whole, then fragmentation is a good thing. In Japan, it’s not been a problem. The market isn’t being divided; it’s not a case of business leaving the TSE and going elsewhere. The key thing is that the TSE and other venues all grow as a whole and that we maintain a high level of transparency.”
As Japan’s financial industry continues to develop electronically, high transparency and highly efficient use of networks will no doubt be topics we will be hearing much more of down the line.
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