Proprietary trading system (PTS) Chi-X Japan has introduced hosted risk controls, which it says will offer cost advantages to brokers and latency-sensitive traders by removing the need to have their own systems.
Brokers that wish to use the risk control services will be required to purchase a server at the venue’s data centre. Chi-X Japan will then host the server at the firm’s co-location area and install the necessary FIX gateway, complete with the risk controls. The brokers also receive a real-time data feed, enabling them to keep track of their risk.
“This is designed for latency-sensitive participants and brokers who want to offer low-latency access to our venue, without compromising any risk controls,” said Samson Yuen, CTO, Chi-X Japan. “Our system is fast – the additional risk controls add less than ten microseconds of latency.”
At present, sponsored access is not allowed in Japan. Brokers are required to conduct reasonable risk checks before their trades reach the trading venue. But Yuen insists the Chi-X Japan solution does comply with the existing rules. Users are able to set pre-trade risk controls, including notional limit, lot size, tradable stock list and max shares, effectively allowing brokers to set limits on their own flow at the exchange level.
“These risk controls satisfy the regulatory criteria, because they are configured by the brokers,” he said. “The hosted risk controls we are offering allow the brokers to adjust their risk parameters on a daily basis.”
The Chi-X Japan hosted risk controls could result in cost savings for sell-side firms. In the US, the ban on naked access introduced in July last year forced many sell-side firms to implement their own pre-trade risk controls. According to research firm TABB Group, the cost was significant, rising from an estimated US$220 million in 2011 to a predicted US$292 million in 2014. Naked access involves buy-side firms using broker IDs to access trading venues without any pre-trade risk controls.
Chi-X Japan accounted for 2.09% market share in Japan in April, down from 2.49% the previous month and 2.65% in January, according to figures from Thomson Reuters Equity Market Share Reporter. As of 23 May, the PTS is currently on track to hit 2.53% market share this month.