The Japanese securities industry needs to invest in co-location technology to reduce trading latency, as well as upgrade its core trading systems and adopt cloud computing solutions to increase efficiency and reduce costs, argues a new report by financial research firm Celent.
While the Great East Japan Earthquake in March 2011 may have damaged stability in the Japanese securities market in the short term, IT spending in the Japanese securities industry is likely to reach US$6.3 billion for the year ending March 2015, up from US$5.1 billion at year end March 2010, suggests the report. Celent foresees a compound annual growth rate of 4.3% in the industry’s IT spending to year-end March 2015.
In particular, the research highlights the progress made by the incumbent Tokyo Stock Exchange (TSE) in improving transaction speeds through IT spending. The exchange installed its arrowhead trading platform in January 2010, a move that has widely been credited as a success in reducing latency and driving up order throughput. The report also notes the impact of increased competition from proprietary trading systems, including Chi-X Japan, which launched in July 2011. Arrowhead is slated for a further technology upgrade in May 2012, while the TSE’s proposed merger with the derivatives-focused Osaka Securities Exchange may also necessitate further technology investment.
Meanwhile, changes in technology infrastructure mean that trading technology vendors will need to address the demand for ever-faster execution speeds and prepare their own cloud computing solutions to ensure that market participants can respond quickly to market changes and implement new solutions as rapidly as possible.
“Factors such as faster execution speeds, the proliferation of increasingly advanced mobile devices, and an emphasis on cloud computing can be expected to drive securities companies to spend actively on IT,” said KyongSun Kong, analyst with Celent’s Asian financial services group and co-author of the report.
The largest component of IT spending is currently internal, with spending for the industry for the year ended March 2010 accounting for US$3.2 billion, or 62.9% of all IT spending, according to Celent. The firm forecasts that internal spending will reach US$3.9 billion for the year ending March 2015. Meanwhile, the next largest component of internal corporate spending is likely to be hardware, suggests the report, accounting for 25.3%, or US$1.3 billion, of IT spending. Celent forecasts that IT spending on hardware in the year ending March 2015 will reach US$1.6 billion.