Recent outages at US and European exchanges have raised concerns as to whether competition between trading venues to provide faster trading has come at the cost of reliability. In Japan, where earthquakes pose the biggest operational risk, the Arrowhead low-latency trading platform is designed to handle the contingency promptly, says Tomoyoshi Uranishi, senior executive officer at the Tokyo Stock Exchange (TSE).
“Our target is 99.999% reliability. For example, if an earthquake happens in Tokyo and the main trading centre collapses, we will be able to restart trading within 24 hours in the back-up system,” he says.
On 5 October, London Stock Exchange-owned multilateral trading facility Turquoise started trading an hour and 15 minutes late, a day after the venue's migration to a new technology platform. This was followed on 13 October by a total shutdown for 30-40 minutes across NYSE Euronext's European markets, which was blamed by the exchange on human error. Two days earlier, trading in 60 US equities overran into the close period by almost an hour on the exchange's New York platform.
Currently, Arrowhead has capacity to accept 46.8 million orders per day and the aim is to consistently maintain Arrowhead's capacity at twice the actual trading volume. “So far, there have been 10 million orders on average per day. We hope to have more than 20 million orders per day,” says Uranishi. “If the volume of orders increases more than the critical level suddenly, we can enhance the system within a week such as by adding servers to the current system.”
According to TSE data, ”first section' trading value fell from 34.1 trillion yen (US$420 billion) in May to 26.1 trillion yen in September. (Stocks listed on the TSE are separated into “first section” for large companies, “second section” for mid-sized companies and the “mothers” for high-growth and emerging stocks.)
Market participants agree that TSE's Arrowhead has resulted in substantial improvements in the trading profile of Japanese equity markets under normal circumstances, although there have not been any large event trades that might have revealed the system's potential limitations to date. In particular, the new matching mechanism has alleviated the risk of not being able to complete orders at the close.
But improvements at the exchange level cannot be expected to offset a deterioration in investment conditions. The decline in Japanese equity trading volumes since May is due to world economic conditions and the TSE has been trying to enhance activity by pushing the Arrowhead system to more global investors, Uranishi says. “The market trading value has been decreasing but this month it increased by more than 1.5 trillion yen per day. I hope this trend will continue. After the introduction of Arrowhead, trading volume increased, but from the peak of May, the market trading value has decreased by 30%,” he observes. “But it's a global trend: there are concerns about the world economy and the tightening of investment regulations for investment banks. After many long discussions, the regulatory climate is becoming more reasonable and more market friendly, so there is some hope for increasing market trading volume. Our current trading value is smaller than we expected initially, but I hope it will increase when the world economy recovers.”
A large part of the TSE's focus has been on attracting more high-frequency flows to the exchange, particularly through the provision of low-latency co-location services designed to provide trading participants with high-speed access to its systems. Since May 2009, the TSE has been providing co-location services at its primary site. “In the case if a trader sends an order via co-location, the one-way order response is 75 microseconds,” he notes.
According to Uranishi, TSE's share of equity trading remains at 95%, with a major portion of institutional orders routed through its block trading system, ToSTNET. The combined share of trading by proprietary trading systems (PTSs) stands at around 1%; dark pools account for the remaining 4%.
In a move to enhance its competitiveness and boost trading volumes, the TSE is considering extending its trading hours, which are currently limited to four and a half hours per trading day (9am to 3pm with a lunch recess from 11am to 12.30pm), shorter than most major overseas markets. Uranishi suggests that a change in opening hours could attract retail flow from PTSs.
“Some investors, such as ”salarymen', trade at night. TSE is closed in evening or night time, so we are now discussing the possibility of extending our trading hours,” he says.
The plan to extend the exchange's trading hours will be finalised by the end of this year.