Prohibitive costs are driving global trading firms looking to participate in Japan's evolving markets to seek cost-efficient alternatives, explain Laurence Thiery, managing director, Asia-Pacific strategy and solutions, and Takashi Nagai, Asia product manager, Japan at NYSE Technologies.
Tokyo is drawing a growing number of global trading firms. As the number of market participants and trading venues increase, demand for similar services as those used in Europe and the US markets will rapidly start to develop.
Tokyo represents an attractive alternative compared to other developed economies. Financial firms seeking to invest in new markets can take advantage of co-location and proximity services and a broad range of trading technologies specific to Japan.
But there are extensive deployment and maintenance implications. In addition to large investments to set up the infrastructure and subsequent operating costs, Japan poses unique obstacles for anyone looking to establish a local 'colo' and/or prop trading presence: it can take from four to six months or more to procure and deploy a colocated infrastructure.
Establishing and maintaining connections to Japan's major exchanges is highly complex, given the disparate requirements of each.
Some Japanese exchanges do not offer a dedicated network and instead use a vendor-provided service, leaving participants with the decision of which network to adopt. This could result in a trading participant having to deploy and support a unique network profile for each exchange, adding further complexity to the selection of appropriate lines and bandwidths for each market.
Major enhancements to the Tokyo Stock Exchange and Osaka Securities Exchange trading engines have necessitated extensive costly and time-consuming infrastructure upgrades with more upgrades expected in the near future. For new entrants, the cost of maintaining infrastructure and finding qualified staff can be critical factors for business continuity.
In addition to language and cultural differences, localisation considerations include legal, administrative and tax requirements. For example, certain payments must be made in yen, and often Japanese legal entities may require entities to execute a 'Japanese-only' contract. Also, there are specific tax implications. It is therefore critical to have local legal, financial and tax advisory expertise.
Many firms are looking to take fiction out of global trading, whilst new entrants are seeking to establish a trading infrastructure in Tokyo in the shortest time to market and without significant capex investment.
Local firms face their own challenges. They require multiple network circuits and different technical knowledge base for each Japanese exchange resulting in even higher maintenance costs (both capex and human resource). As stability and reliable local support are high priorities for them, the challenge is achieving these priorities within acceptable maintenance costs. Some mid-sized brokers attempt to reduce these costs without compromising connection stability and reliable local support, typically via providers of managed trading solutions.
To remain competitive, Asian firms outside Japan – such as regional brokers in Hong Kong and Singapore – also want to offer their clients a wider range of markets to trade. This client segment is looking for a reliable, rapid deployment and cost-efficient third party service across multiple geographies and asset classes, without significant capex investment.
The global liquidity Approach
The NYSE Technologies Tokyo Liquidity Centre offering is designed with all of the above client segments in mind. NYSE Technologies 'global liquidity center' approach provides a more affordable and flexible way to trade in close proximity to global markets like Tokyo. This can be achieved by offering trading services akin to those offered by NYSE Technologies at the Mahwah (US) and Basildon (UK) liquidity centres, but instead of being hosted within a NYSE Technologies owned data centre, these products and services are now being made available in satellite sites. The new Tokyo Liquidity Centre is connected to NYSE Technologies' global trading backbone, and is strengthened further by the recent acquisition of Metabit which broadens NYSE Technologies'community of clients in the Asia region making NYSE Technologies well positioned to help customers meet the challenges of trading in Japan.