New research from agency broker and technology provider ITG has shown that trading costs for Japanese equities dropped by 36% in January, following the introduction of the Tokyo Stock Exchange’s (TSE) new Arrowhead trading platform.
The drop in trading costs was most pronounced for large-cap Japan stocks at 46%, followed by mid-caps by 27% and small-caps by 14%. According to Ofir Gefen, head of research for ITG Asia-Pacific, the reduction in trading costs – the largest decrease for over a year and a half – was a result of finer tick sizes and Arrowhead’s improved trade matching technology.
Smaller tick sizes on the TSE have resulted in narrower spreads, which is cutting costs for traders that decide to cross the spread to complete a trade. According to ITG’s data, the average bid-ask spread in January was 20.7 basis points, compared to 24.4 bps in December 2009 and 25.3 bps in January 2009.
“Given the smaller tick sizes, there are more pricing points than before at which orders can get executed within the same limits,” Gefen told theTRADEnews.com. “This can mean that traders don’t have to wait so long to get their orders filled at a certain price, and results in more frequent, smaller trades getting done at the various price points along the way.”
The average trade size on the TSE also dropped, to 400 shares with an average value of around ¥620,000 (US$6,896) in January 2010, from 600 shares per trade with an average value of just under ¥1,000,000 (US$11,112) in December. But average daily value traded on the exchange grew to US$18 billion from around US$16 billion in December 2009.
These trends, coupled with the reduction in latency and an increase in capacity achieved by Arrowhead, are expected to entice new types of liquidity to the TSE, according to Gefen.
“All these changes encourage more electronic trading, particularly algorithms, and should help encourage liquidity to the exchange,” he said. “We should expect to see turnover increases over the longer term as more algorithmic trading is adopted and high-frequency trading firms increase their trading in Japanese equities.”
ITG’s research is based on an analysis of its Peer TCA database, which covers approximately 20% of total Japanese trading turnover.
The new Japanese trading environment will require brokers to implement a superior trading infrastructure, according to a new report commissioned from Aite Group, the research consultancy, by Asian trading technology and execution broker Tora.
According to Aite’s report, ‘Launch of Arrowhead: The need for next-gen broker in Japan’, the TSE can now handle 56 million orders per day, double its previous capacity before Arrowhead was implemented. Latency has also been drastically improved. Arrowhead can generate order acknowledgment messages in under 10 milliseconds, and fill notifications in less than 25 milliseconds, compared to several seconds on the TSE’s old system. Message processing has also improved, with Arrowhead able to process 500,000 messages per minute, compared to 35,000 messages a minute previously.
The study claims the short-term impact of Arrowhead will be most important to high-frequency traders, but that a more sophisticated approach by brokers will become increasingly essential as advanced trading methods develop.
“With the launch of Arrowhead, the TSE is revolutionising Japan’s equities market, bringing it fully into the digital age,” said Sang Lee, managing partner with Aite Group. “Buy-side participants hoping to succeed in this new trading environment cannot afford to rely on traditional brokerage services.”