Impacting the Basics
Mihai Bistriteanu of Citigroup Global Markets Japan focuses on the trading pattern changes post-arrowhead implementation as well as its many opportunities and challenges.
Without a doubt, the Tokyo Stock Exchange's (TSE) implementation of “arrowhead” this January 2010 was one of the most important events in the history of Japan’s equity trading, with a lot of information and articles being circulated on the structural changes following the new system’s implementation. It is indeed amazing how arrowhead’s implementation changed the very core of Japan’s trading landscape making a huge impact on latency, market volume, trade size, price, as well as tick size dynamics.
Low Latency
Primary exchange speed was along awaited feature in Japan. The one digit millisecond turnaround on a non-collocated infrastructure, promised by the Tokyo Stock Exchange (TSE), is now finally happening in Japan, with a few interesting trends starting to develop as a result of the higher speed:
- Strategies requiring low latency infrastructure can now be easily implemented across Japanese stocks.
- There is an ease of integration of TSE flow within SOR (Smart Order Routing) systems and crossing engines.
One of the key drivers of arrowhead implementation is the aggressive growth of competition in Japan. The PTSs (Proprietary Trading Systems) and broker dark pools had the speed, and in some cases, price as competitive advantages. The liquidity available outside the primary exchange is still small compared to the ratios seen in Europe and the US.
A large percentage of the sophisticated buy-side investors refrained from using SOR technologies to avoid missing liquidity in the primary exchange because of the overall latency.
A standard matching system, with queue jumping functionality when posting liquidity, usually places multiple legs of the same order in multiple venues. When an order is matched in the proprietary crossing engine, the system sends cancellation requests to the other venues, and only when the acknowledgement is received is the cross executed.
The bottleneck for this technology used to be the speed of receiving the acknowledgement from the primary exchange, when the cross was found. Similarly SOR technologies send IOC (Immediate or Cancel) orders to multiple venues including primary exchanges. When one of the venues is slow, it will delay the entire system, therefore missing rapid price changes.
The fact that the TSE infrastructure speed is now in-line with its competitors will have a positive effect in widening the use of liquidity aggregation tools. This also may eventually result in an increase in liquidity on the alternative liquidity pools. The new broker pools and PTSs have to be competitive on all parameters (speed, price and liquidity) to enter and be successful in the Japanese market now.
Market Volume and Median Trade Size
Following the implementation, the volume growth started gradually. At this very moment, as I am writing this article, the rate of growth is still very positive. We expect this to reach saturation over the next couple of months. The main drivers behind the growth are the new strategies that take advantage of the high speed environment, as well as the general increase in activity at the beginning of the year and the market recovery.
