Arrowhead to shake up Japan’s equities market

The launch of Arrowhead, the Tokyo Stock Exchange’s new trading engine for equities and corporate bonds, is likely to significantly alter the competitive landscape of Japan’s equities markets, affecting the businesses of both brokers and off-exchange trading platforms.
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The launch of Arrowhead, the Tokyo Stock Exchange’s new trading engine for equities and corporate bonds, is likely to significantly alter the competitive landscape of Japan’s equities markets, affecting the businesses of both brokers and off-exchange trading platforms.

The long-awaited system, which started operating on 4 January, has cut the TSE’s order response time to five milliseconds and data distribution to three milliseconds, bringing it into line with exchanges in other developed countries. Fill notifications on TSE previously took around three seconds. Arrowhead has also boosted the exchange’s order capacity to 46 million from 28 million previously and will ensure that capacity will always be twice the peak number of orders per minute.

The new system is expected to facilitate a wider range of trading strategies and attract a broader range of market participants, in particular high-frequency traders and statistical arbitrageurs that operate in other markets around the world. Research and consulting form Aite Group estimates high-frequency trading will increase to almost 45% of the TSE’s average daily share volume by the end of 2012 from 20% pre-Arrowhead.

TSE has also introduced a series of rule changes which, among other things, have reduced tick sizes in certain price ranges.

The tick-size reduction in particular could come as a blow to Japan’s off-exchange trading platforms, known as proprietary trading systems (PTSs), which include SBI Japannext,, and agency broker Instinet’s CBX Asia block crossing network.

“One potential negative for alternative platforms is that Tokyo is fixing a long-standing problem of having the widest tick increments amongst developed markets and this has tightened. One of the competitive advantages of the PTSs was tighter tick increments,” Glenn Lesko, CEO of Instinet in Asia told

The sharp reduction in TSE’s order acknowledgement times will also remove another of the PTSs’ competitive advantages, but it’s not all bad news for Tokyo’s smaller rivals.

“In launching Arrowhead the TSE has improved the Japanese equity market but by doing so it is also going to encourage off-exchange trading,” said Lesko. “Because it previously took so long for the Tokyo prices to change, it was hard to build routing technology that could react to the market. Now, you can react to real-time market data and you can route your orders elsewhere if you see a better price.”

Robert Laible, head of electronic trading services, Asia at Japanese broker Nomura, says PTSs fill many needs and so will be affected in different ways. For example, some firms use off-exchange platforms to hide their intentions rather than trade with lower latencies or finer tick sizes. “There are many different kinds of motivations for setting up alternative trading systems and just because the Tokyo Stock Exchange has updated its technology platform doesn’t mean that the incentive for going to or creating alternative trading systems has gone away,” he said.

Nomura launched its NX crossing network and SmartDMA routing and execution algorithm in Japan in the latter part of 2009.

As a result, some expect both the TSE and alternatives to benefit from Arrowhead. “My guess is that the whole pie of the marketplace will increase, which will benefit everyone involved,” said Sang Lee, managing partner at Aite Group. “I do think the TSE will lose market share to a certain degree, though perhaps not as much as we have seen in both the US and European markets.” In an impact note on Arrowhead’s launch authored by Lee, Aite predicts that PTSs’ market share will increase from 8% today to close to 17% by the end of 2012.

Arrowhead’s arrival could also affect the competitive landscape for brokers. According to the Aite note, the changes wrought by the new trading system will require buy-side firms to employ ‘next generation’ brokers that can offer guidance, trading platform connectivity and access to algorithms and transaction cost analysis.

The new platform could give brokers that already have these capabilities a new opportunity to shine in Japan. “The Arrowhead launch allows us to differentiate ourselves because the client can take advantage of our electronic trading tools in a way not permitted by the previous exchange system,” said Instinet’s Lesko. “We can now apply the electronic trading tools we use elsewhere in Japan more effectively and differentiate ourselves more than we have been able to before.”

Brokers are also having to adapt systems to take advantage of Arrowhead’s new capabilities. “We have made changes to our analytics and algorithmic trading strategies to take advantage of the new data,” says Punit Mittal, global head of electronic trading services at Japanese investment bank Daiwa Capital Markets. “It is early days so we will continue to fine tune the strategies to make sure that we take full advantage of the changes.”

Trading technology firm Fidessa has announced that the majority of Japan’s leading brokers are now trading on Arrowhead using its trading platform. In addition, NYSE Technologies, the technology arm of global exchange group NYSE Euronext, has launched a series of data feed handlers for Arrowhead, and data vendor Thomson Reuters has launched a market data delivery solution for the new platform.

Although it has been running for less than two weeks, Arrowhead is already starting to make its presence felt. According to Thomson Reuters, daily volumes on the most active stocks were up almost fivefold in the first week after the launch.

“What’s surprising is how quickly Arrowhead has already impacted market activity,” said Miftah Khan, global head of transactions analytics, ETI, Thomson Reuters. “While the impact hasn’t been across the board, the most heavily trades and low stock price instruments are clearly demonstrating an increase in volume despite low overall market volume. This indicates some algo improvements have already been made in line with Arrowhead, ahead of broader adoption over the next quarter.”