Broker-dealer Credit Suisse has made a version of its Pathfinder smart order router (SOR) available to clients trading in the Japanese market following a period of internal testing.
“We have basically taken the same SOR technology we use in other markets, such as Europe, and adapted it to the Japanese market,” Olivier Thiriet, head of Asian alternative execution at Credit Suisse, told theTRADEnews.com.
While off-exchange executions accounts for a small percentage of overall trading in Japan, there are now several venues trading Tokyo Stock Exchange (TSE)-listed shares. These include the Osaka Stock Exchange, Kabu.com, SBI Japannext, Liquidnet, Instinet’s CBX and JapanCrossing platforms and several broker internal crossing engines. “Without SOR, you cannot possibly leverage the advantages these venues offer,”
Pathfinder provides two functions – liquidity taking and liquidity posting. When posting, the router dynamically adjusts where orders reside according to the available liquidity at the venues it accesses. For example if it discovers that one venue has more liquidity in the relevant stock, it will shift more orders there. “The SOR is extremely fast to enable it to capture these opportunities, which could only be available for a few milliseconds,” said Thiriet.
Adapting this dynamic posting feature to the Japanese market has proved challenging. “The latency of the venues in Japan varies,” said Thiriet. “The TSE, for example, is quite slow compared to exchanges in other major markets. When you are posting orders with the SOR and you need to dynamically rebalance those orders, you need a slightly different type of logic and mechanisms so you don’t have any issues with other orders or any missed orders because of the latency.”
However, he adds that the liquidity taking function of the SOR is unaffected by this.
Another challenge was the order types supported in Japan. “Some venues don’t have fill-or-kill order types, for example, and the order types are slightly different on each of the venues, so we had to adapt to this,” said Thiriet. “Some of the venues don’t have dark order types, so we are not able to hide portions of orders on those venues like we can in other markets. ”
While off-exchange trading remains low in Japan, Thiriet is confident that the new router will boost Credit Suisse’s own off-exchange activity. “The results we are getting are very positive. We execute between 12% and 15% of our clients’ order flow in Japan in our CrossFinder internal crossing engine, and now our SOR connects to the alternative venues we expect to trade an additional double-digit percentage off-exchange,” he said. “This will bring our total off-exchange trading of client orders in Japan, including CrossFinder, above the 20% mark, and deliver significant price improvement.”