The Tokyo Stock Exchange (TSE) has achieved the first target of its arrowhead development project in terms of speed and reliability over the past year, according to Noriyuki Takahashi, the exchange's associate of IT development – and the man with ultimate responsibility for the platform.
“We designed the arrowhead structure to realise availability of 99.999%. We achieved reliability by processing trading data such as order, execution and order information data on triplex servers,” he said. The triple redundant configuration ensures that no information is lost even if one node fails, because the other two nodes are synchronised in real-time with the same information.
“In addition, arrowhead is equipped with the function to perform an emergency transfer to alternative processing servers to secure a high level of system security in the sense of maintaining smooth trading,” added Takahashi. “Even in the case of order concentration in a certain issue, we can safely allow trading to continue by transferring it to another processing server. This way, arrowhead achieves both high speed and reliability.”
Since its launch on 4 January 2010, arrowhead has recorded an average order acceptance response time of two milliseconds, against a targeted 10 milliseconds. The order response time before arrowhead was two seconds.
On 25 February this year, the TSE published a report, ”TSE Equity Market Summary after arrowhead Launch', that provided a one-year review of arrowhead's performance. The report noted a downward trend in the execution ratio post-arrowhead, which Takahashi attributes to the increase in high-frequency trading since the platform's introduction.
The report also noted that there has been no market interruption against the target availability of 99.999% over the past year, when smooth transition to arrowhead proceeded without major disruption. It noted that capacity has not been expanded during the past year and highlighted arrowhead's ability to handle rapid updates of operational applications that have accelerated simultaneous order processing and the introduction of Immediate Or Cancel (IOC) Order Support.
IOC Order Support was added on 24 January 2011. “When you order by this function, if your order matches the other broker's order, your order gets execute immediately, if not, your order will be cancelled,” noted Takahashi.
The TSE report also highlights arrowhead's scalability, which has been built on three factors: the ability to always maintain capacity at twice the peak number of orders per minute; expanding within one week of exceeding scalability criteria; and ”scale-out architecture'.
“Usually, enhancing processing capability means either enhancing the processing capability of a single server unit, also known as scaling up, or by simply adding servers with the same settings made possible by scale-out architecture,” said Takahashi. “Since arrowhead places emphasis on swift response, we adopted scale-out architecture for the platform. We believe that by adopting a scale-out approach, we can ensure smooth trading and swiftly adapt to processing needs and changes in the market.”
From a trading perspective, market participants have noted a dramatic reduction in spreads, average trade sizes and trading costs post-arrowhead. “Japanese typical trade size and spreads both underwent a significant drop between December 2009 and January 2010, and we would cite arrowhead as a primary reason. We saw a fairly stable level prior to arrowhead, then a significant drop (in the region of 30% in average order size, and 25% in spreads). Both of these metrics have re-stabilised at this lower level,” said Clare Rowsell, ITG's head of client relationship management & marketing.
ITG's ”Asia Pacific Liquidity Barometer' for February showed a typical trade size of around 400 shares and value of around 600,000 yen in Japan over the past year. Prior to January 2010, the average trade value had been close to a million yen and the typical trade size had been around 600 shares. In January 2010, these dropped to below 650,000 yen and around 400 shares correspondingly.
Rowsell noted an average of eight-basis-point drop in trading costs that was been sustained through 2010. “That may well be attributable to the changes that arrowhead introduced, particularly around the spreads, which resulted in immediate cost savings,” she says, adding, “There was an implication immediately that average trade sizes got smaller. We see that normally in a market where there's more electronic trading, so one of the reasons could be that more electronic trading was attracted to the exchange because of arrowhead.”
Ian Lombard, chief operating officer of Tora, a broker and technology provider, pointed out that an update to how spreads are defined by TSE also contributed to a “meaningful reduction” in the bid/ask spread. “We’ve seen these lower spreads holding at a consistent level for the last several months,” he said. “There still are some delays as names trade very heavily, but it is a material improvement over pre-arrowhead and has definitely been received very well in the market. Now that we're starting to see some success with (proprietary trading systems) Japannext and Chi-X Japan, those in conjunction with arrowhead, will lead to spreads contracting further.”
Not only have arrowhead's enhancements to the TSE's latency and capacity helped to reduce bid-offer spreads, said
Murat Atamer, head of product, AES, Asia-Pacific at Credit Suisse, they also changed the kind of trading that is possible in Japan. “This has opened up room for market makers and high-frequency traders, and that means the market rules and regulations have to keep up with what we see in comparable markets,” he said. “For example, abolishing the uptick rule and lot sizes, along with allowing direct connection to other venues from the TSE co-location site, are key to enhancing volumes.”