Posted by Giles Nelson
And from Mumbai on to Tokyo. In so many ways, a bigger contrast between cities is difficult to imagine.
Japan has, of course, had a tough time of it recently. Not only has the recent earthquake and tsunami knocked Japan back, but also Japan has had a long period of relative economic stagnation, compared to other Asian economies. Its development in algorithmic trading also sets it apart from other developed economies due to the relatively low proportion of trading which is done algorithmically.
There’s little consensus on what this proportion is however. In a recent report, Celent, the financial market analyst firm, reported that around 25% of trading was algorithmic in 2010. Figures from the Tokyo Stock Exchange (TSE) report that around 35% of orders submitted to the exchange are from co-location facilities – it is reasonable to assume that nearly all of these could be regarded as “algorithmic”. From my conversations with people in the days I was in Tokyo who worked at exchanges, sell-side firms and our customers and partners, I’m going to put the figure at between 40-50%.
That means there’s a lot of room for growth when you consider that the proportion of securities traded in the US and Europe algorithmically, in one way or another, nears 100%. One inhibitor to growth has now been removed. In 2010, the TSE launched a new exchange platform, Arrowhead, which reduced latency from up to two seconds down to around 5 milliseconds. In other words, the TSE is now “fit for purpose” for algorithmic trading and, in particular, for high frequency trading. Previously, with latencies being so long, high frequency firms who, for example, wanted to market-make on the TSE, simply weren’t prepared to take the risk of the exposure and uncertainty that such high latencies bring. Since Arrowhead's launch in January 2010, and according to the TSE’s own figures, the total number of orders on the TSE has risen by a modest 25%, but the proportion of orders submitted from co-location facilities has more than doubled.
Progress exhibited and spoke at Tradetech Japan and we were joined on our stand by our partner, Tosho Computer Systems, that we’re working with on a service in Japan which we will be launching later this year. They’ll be more news on that nearer the time. Attendance wise, Tradetech was down on its peak in Japan in 2008, but up on previous years – a reflection of the renewed interest in trading technology generally.
Market surveillance was one of the key topics that came up in Tradetech Q&A and panel discussions. This is common across pretty much any market now, with the essential question being: how can markets be kept safe as markets get faster and more complex? Some say there should be restrictions and whilst circuit breakers, insistence on pre-trade risk checks and similar are important, over emphasis on “the dangers” can hold markets back. Progress’ view is that regulators and exchanges should all move towards real-time market surveillance. (Find more on this here and here).
There’s a lot of emphasis at the moment in European and US markets on OTC derivatives regulation and the move of trading in such instruments onto exchanges. Japan is relatively advanced in this regard with regulation requiring many domestic OTC derivatives to be cleared, a trend which is happening elsewhere in Asia too more quickly than in Europe and the US.
Regionally, Japan is the biggest developed market in terms of share trading volume. Twice as big in dollar terms than the next biggest, Hong Kong. But Japan is itself dwarfed now by China and I’ll be writing about that next.