Change In Japan

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With Susumu Usui, Head of Electronic Trading Services Japan, Nomura, and Akio Hori, Deputy Global Head of Execution Services IT, Nomura.
In our view, the exchanges in Japan are very stable and we don’t foresee any notable issues. From a business point of view, we are confident in the TSE’s technology. Two macro-level events will happen in the near future: first is the up-tick rule change, and second is the decrease in tick size the exchange is going to start implementing early next year. These two events will increase the number of messages drastically and will put the TSE technology infrastructure to the test.
With the TSE-OSE merger, OSE names have started trading on the TSE system. The volume in these names increased twofold for a couple of weeks after the merger, but we didn’t see any system issues.
Over the mid-term, one of the things that the exchange ensured when they introduced Arrowhead back in 2010 was to make the platform very scalable. They built some in-house benchmarks to ensure that when volume capacity reaches certain thresholds, they can easily introduce new servers to expand capacity. They have done this successfully several times over the last four years. With this new model and the implementation of Arrowhead, we think the exchange will continue to provide a scalable platform for market participants where they can increase capacity on demand.
One of the other things that the exchange has introduced was co-location service in 2010. The new JPX co-lo site was developed and went live in May. It has much better facilities and lots of services are being provided on the fly. In our view this is really good innovation.
Looking at the future implementation of Arrowhead, first, a major upgrade is expected in 2015. Due to industry demand and regulatory pressures, the exchange will likely implement a range of new risk controls such as cancel on disconnect and kill switches, and some of these may be rolled out prior to the major upgrade. That’s obviously something members brokers like ourselves and the exchange will continue to discuss.
Second, latency will continue to be a key theme in our industry. Almost every six months we hear a new story about somebody delivering better performance and better latency. The exchange will definitely need to continue innovating and improving this metric in order to maintain its status as one of the world’s top exchanges. There was always a long outstanding question about OSE versus TSE, but this is now resolved as the two have been consolidated.
The OSE was a relatively small market, with a different investment cycle and performance. With the consolidation, we can now operate on a single platform that provides very consistent latency and performance, which is definitely a benefit for us.
Also the OSE used to close later than the TSE, but we still needed to trade our baskets introducing additional risk for us. Now, these names close at the same time, which simplifies our processes.
We think the short-sell regulation changes in November, the small tick market introduction, and the Arrowhead innovation in 2015 are real drivers of change. We will see a big volume increase, more trading volume, more cancellations and more market data.
In terms of client trading style, once smaller tick sizes are implemented clients may not be able to enjoy decent spread savings by waiting on the near side, perhaps it would be better to use implementation shortfall as a strategy or a liquidity driven strategy as the average waiting time on the exchange will shorten.
There is definitely a change in the way vendors are coming into play. Over the last few months we’ve been seeing lots of these new players quite actively reaching us and our clients. We think this is an ongoing evolution. There will be more opportunities for vendors to come in to play, particularly in the low latency space.