Gaining Ground: Proprietary Trading Systems Expand in Japan

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By Yasuo Hamakake
Yasuo Hamakake of Chi-X Japan catalogs the growth of Proprietary Trading Systems (PTSs) in Japan and discusses the prospects for the coming year.
Chi-X Japan launched last year, and we just passed our one year anniversary. Our launch coincided with the Japan Securities Clearing Corporation (JSCC) opening up to the PTS venues. Since the launch, volumes have grown steadily, participants continue to connect and find new trading opportunities on PTSs. We have seen new Smart Order Routing (SOR) technologies introduced by broker-dealers, which has also contributed to PTS growth in Japan. Most importantly, we are looking forward to new trading participants and growth in the market overall. Market participants who are trading with global platforms, such as Chi-X, are more likely to trade Japan via a familiar platform.
A Year in Review
At the beginning of the last year, the Tokyo Stock Exchange (TSE) upgraded to the arrowhead platform. The TSE used to take a few seconds to transact a trade, but now it is 100 times  faster. For that reason, new types of participants, whether algo-driven or high frequency, can consider entering the market. Also, new venues contribute to a healthy level of  competition between the venues. Each venue has a uniqueness, which in turn will motivate different types of market participants to trade Japan. Our focus is to provide unique  trading opportunities through advanced order types and tick sizes, while offering a low-latency trading system.
PTSs: Price Improvement or Low Latency?
The goal is to provide an equal trading venue in the Japanese market. With our recent growth, and PTSs now accounting for over 5% of volume of the Nikkei 225, there is a positive variance for people who are trading in PTS in Japan. In terms of price improvement, Chi-X had a better price than the TSE, 93% of the time. In addition, the introduction of the maker-taker model is another motivator for new trading participants.
Regulatory Reform
The PTS rules and guidelines were established in 2000, when the market structure was very different. Some of the rules that exist today do not reflect the current market conditions. For example, one could question whether the 5% Takeover Bid (TOB) rule for the PTS venues and the 10% threshold rule are applicable for the venues today. We have ongoing dialogue with the regulators and will continue to collaborate with our trading participants.
Looking Forward
Fragmentation in Japan has naturally increased since we entered the market, but it will take time to fully develop. We can see similar trends, in terms of fragmentation, that we saw in Europe, Canada and the US. We expect continued healthy fragmentation in the Japanese market in the coming years. For example, Chi-X Japan handles about 3% of the Nikkei 225 Index value traded today. It is important to continue to work with trading participants so that they are aware of the benefits of PTS.
Our goal is to grow the Japanese marketplace together, as new participants become familiar with PTSs, they will continue to drive growth. We will continue to push regulatory reform and introduce new services and features that benefit all trading participants.