Backing the tortoise - Is Japan’s slowly, slowly approach the best route to the best best execution?
As the fable of the hair and the tortoise taught us, being the fastest away from the blocks does not guarantee the best result. Most in the trading community agree that Japan has lagged behind international standards, despite the importance of its market. However, as Peter Twist of IND-X Securites reports, taking a look-and-wait approach may be Japan’s path to success.
These days, it seems impossible to have a discussion about trading without someone alluding to the concept of a more formalised “best execution” mantra. Fuelled by the ever increasing number of independent execution venues, the obsession with best execution might have become a global fad, but is it anything new? Arguably, the practise has always been at the forefront of all those within the trading community, aided by varying degrees of direct involvement from fund managers. Yet, if this is the case, why is there suddenly so much interest? The fundamental issue surrounding the topic of best execution has to be the underlying meaning. What is best execution?
Everyone has an answer, but there is no single definition that satisfies all parties, and divergent motives allow for significant freedom of interpretation. Even within segments where one might expect a degree of consensus, there is scope for fragmentation. For instance, fund managers who fall into the long term buy and hold category could differ markedly from shorter term momentum investors who could, in turn, be diametrically opposed to the latency play individuals. While the definition of best execution isn’t, in itself, a reason for choosing one execution venue over another, the lack of unanimity only serves to support the self-serving world of best endeavours.
Japan catching up?
Historically, Japan has never been at the cutting edge of new trading landscapes. Rather it has often been slow to move beyond the primary exchanges (including some of the smaller, regional exchanges), and still offers very little in terms of alternative venues. While PTS or similar licenses are now available, and some leading brokers have applied to operate competing venues, there have been varying degrees of success.
The core issue for Japan has always been, and – at least for the foreseeable future - looks set to be, the divide between its domestic / onshore and its foreign / offshore trading models. The irony is that new best trading practices are not being forced onto the foreign broker by the local authorities, but rather the high number of foreign brokers operating in Japan are forcing change onto the markets. Given the importance Japan plays within the global economy, this is as surprising as it is expected.
Balancing foreign and domestic interests
Domestically, however, any changes that occur are happening at a much slower rate on the back of the onset of a number of retail focused, i-net based platforms. Retail investors have been a leading force in Japan for some time, and it is only natural that regulators need to balance newer ideas with both foreign and domestic interests in mind. The question is: What has this meant for Japan? The upshot is that, despite new trading landscapes with their high degree of automation, significant advances have been slow to gain traction in Japan. The efforts instigated by the bulge-bracket firms may have been implemented in their local Japan operations, but this only caters for up to a third of the trading population.
While Japan’s domestic economic woes should not be overlooked, the country still needs to recognise the demand and the long-road to travel if it is to open up the established exchanges to greater competition. In short, it has to do more to bring down the costs of participating in its markets, and it has to do more to embrace changes currently being advocated, such as the unbundling of trading and research that has driven trading innovations in other international markets.
That said, Japan has its advantages. Widespread fragmentation, seen in other international markets, has not happened, and this has allowed the procedures of clearing and settling to remain relatively straightforward. So, while it is clear that Japan needs to keep abreast of global changes, its careful hold-back approach is not always a bad thing.