Published On: Sun, Nov 21st, 2010

Electronic Trading Growth in Japan is Inevitable

Electronic Trading JapanDespite being almost the largest economy in Asia, Japan has lagged the rest of Asia’s developed markets in terms of electronic trading. However, that is all about to change as the Land of the Rising Sun is poised for an acceleration of electronic trading in a year filled with a much needed overhaul of their financial industry.

The Tokyo Stock Exchange (TSE) “Arrowhead” upgrade, while definitely the most publicized, was a boon to electronic trading in Japan. Since its launch in January we have witnessed increasing volumes and reduced order sizes; the hallmarks of algo driven electronic trading. The upgrade offered a 4 millisecond exchange matching engine and real time tick data. While not the fastest in the world a marked improvement nonetheless.

Alternative trading venues, known as Proprietary Trading Systems (PTS) received a much need boost when the Japan Securities Clearing Corp finally started clearing their trades. This reduced the cost of the post trade and venues like SBI Japannext have seen increased volume achieving as much as one percent of the Tokyo Stock Exchange’s daily turnover.

But the acceleration of electronic trading isn’t just happening in the equity space. Japan’s futures industry has also been very active this year in an attempt to improve service, cut costs and increase open interest.

Both the Tokyo Commodity Exchange (TOCOM) and the Tokyo Financial Exchange (TFX) have engaged KVH to provide proximity hosting affording foreign investors an opportunity to trade these markets with agile algorithms. These exchanges have also started offering remote memberships to overseas traders and along with the proximity service have considerably lowered the barrier to entry into futures trading in Japan.

There has also been some consolidation in the commodities space namely the Tokyo Grain Exchange (TGE) and TOCOM. TGE will use TOCOM’s NASDAQ OMX trading platform, clearing facility and some of its office space next year. TOCOM has also acquired TGE’s stake in the Japan Commodity Clearing House (JCCH) raising its ownership to 63.3% and turning the clearing house into a subsidiary of the exchange.

We have also seen the extension of trading hours to coincide with trading in the US. A litany of MOUs and, interestingly, an extra-market partnership with the Singapore Mercantile Exchange (SMX). The Singapore Exchange (SGX) pioneered cross listing futures and it has proven to increase open interest in both the home and Singapore market. TOCOM and SMX will likely experience the same result as arbitrage takes hold.

We haven’t even mentioned what is going on at the OSE where it too is extending trading hours and its move to share facilities with the TSE or even Tdex+ for that matter.

A report by Celent predicts that algorithmic trading in Japan will double in the next 2 years. While we can’t be sure that that will be the case it seems the investment Japan’s exchanges have made this past year will certainly expand electronic trading in the future.

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