Buy-siders aren’t making the most of Tokyo
Japan is well on the way to becoming
a fully modern market, though not quite there yet, according to a report by
Celent’s Neil Katkov, which also highlights how foreign buy-side firms aren’t
taking the opportunity of remote membership to get direct market access to
‘How to Trade in Japan: A User's
Guide to Japan’s Capital Markets’ is a 45-page report authored by Katkov,
Celent’s senior vice president for Asia, and sponsored by NYSE Technologies.
The paper takes a comprehensive look at the trading landscape, including
regulations, technology, proprietary trading systems (PTSs), exchange-traded
funds (ETFs), clearing, tax and best execution.
Katkov points out that while the
introduction of the low-latency arrowhead platform on the Tokyo Stock Exchange
(TSE) has “made it necessary for professional buy-side traders to use advanced
trading just to trade effectively on the market,” the level of sophistication
has yet to reach that seen in Europe or the US.
“The degree of advanced technology
adoption is still rather low, particularly among the traditional buy-side. I
think there is still a lot of education or development of expertise of
expertise needed among the domestic industry in particular,” Katkov told theTRADEnews.com.
“If you look at the co-location
trading on arrowhead, it’s very high, about 40%, but most of that by domestic
firms, is execution algorithms, such as VWAP, rather than strategic trading
algos or high-frequency trading,” says Katkov.
Better best ex
Best execution is another area where
Japan is lagging, as it is not yet defined in terms of speed, but on a
consensus definition of trading on the venue with the most liquidity on that
issue, according to the report.
“There is no mandated best execution
but regulators do mandate brokers and asset managers publish their definition
of best execution. That consensus is definitely changing: people are now
talking about issues around price, VWAP and implementation shortfall,” says
There is also
growing awareness of ETFs in Japan. But they are yet to register the kinds of
volumes seen in other global markets.
“There is a
lot of interest amongst institutional traders to use ETFs for arbitrage and
other advanced strategies, but they haven’t so far lived up to their potential
for growth,” suggests Katkov.
In a country somewhat infamous for
its bureaucracy and inter-ministry rivalry, it’s little surprise that its
capital markets face a fractured regulatory environment controlled by a number
of different entities.
“Market participants are pretty
united in the belief there should be, at the minimum, coordinated regulation by
the trade ministries that oversees the different equity, FX and financial
derivatives markets; and even better, putting all the products under one
regulator, probably the FSA [Financial Services Agency],” says Katkov.
Since the Financial Instruments and
Exchange Law was enacted in 2008, remote trading membership for the TSE, or
other venues, has been possible for overseas buy-side or securities firms.
However, according to Katkov, since then there has been only one registered
remote participant on any of Japan’s exchanges.
Given that remote
membership is the only true DMA (direct market access) available for Japanese
exchanges – Japan-domiciled buy-sides must still trade through brokers – more
firms could have been expected to take advantage of this.
“The threat of taxation is one of the
barriers. If you are taxed as a resident corporation, the rate could be 40% or
even 50%. However, the Tax Agency has stated, at the request of the FSA, that
they don’t intend to classify overseas traders as Japanese corporations,”
explains Katkov. “Still, the take up is very low. It’s reminiscent in a way of
when PTSs started, in the sense that they were enabled in 1998, the first one
didn’t go live until 2000, and never got significant volumes until last July.”
The report also looks at a recent
trend amongst Japanese hedge funds which had set up in Singapore, due to an
advantageous tax and regulatory environment, now relocating back home.
“For hedge funds, one of the main
reasons to be on the ground is access to funding. You’re not going to easily
get Japanese funds without being here to wine and dine people and demonstrating
that you have capabilities here,” suggests Katkov.
Japanese markets have been suffering
for years from falling volumes and prices, partly due to a lack of retail
investor participation; something Katkov believes needs to be addressed in
order to inject some vitality.
“The first target should be helping
the smaller domestic firms succeed in the new arrowhead environment, which
could take the form of education from the JSDA (Japan Securities Dealers
Association),” says Katkov. “Many of them don’t really know how to do