After a slow start, Japanese proprietary trading systems (PTSs) are seeing an uptick in turnover despite the overall decline in market volumes, says Takayuki Saito, the new head of electronic trading, Japan at Morgan Stanley MUFG Securities.
The growth of Japanese PTSs has for years been stymied by strict licensing rules and the reluctance of tradition-bound domestic fund managers to trade away from the established exchanges, but the entry of Chi-X Japan has resulted in wider general acceptance of PTSs by institutional investors, Saito asserts.
“Chi-X's entry could be one of the drivers for buy-side clients to better capture the liquidity that already exists in alternative execution venues,” he says. “More liquidity, less market impact and faster execution for buy-side clients' orders simply means better execution for them. Buy-side clients have been keenly aware of this so nothing is new. However, the entrance of new venues like Chi-X, which has been very successful in other parts of the globe, probably adds more credibility and comfort for buy-side clients interested in exploring these venues. This could be one of the factors contributing to the recent increase of PTS volume in Japan.”
Also, the fact that the Tokyo Stock Exchange (TSE) has successfully rolled out their new trading system, Arrowhead, which allowed them to reduce their roundtrip latency from an average of three seconds to two milliseconds, has facilitated the wider use of smart order routing technology than before. “The more similar the latencies across various different execution venues, the easier it is for brokers to deploy complicated technologies like smart order routing,” Saito says.
Morgan Stanley MUFG Securities was one of the first brokers to be connected to Chi-X Japan for executing its clients' smart routing orders and DMA orders. The firm has been rapidly growing its electronic trading operations in Asia, with Saito recently joining from UBS and adding to the list of big hires that are part of the bank's push to boost its low-touch trading capabilities. Late last year, Morgan Stanley hired Zach Tuckwell from Deutsche Bank as head of electronic and programme trading distribution in Hong Kong. At the moment, there are only a handful of brokers with connectivity to Chi-X Japan, but many are in the process of getting their smart order routing technology up in order to get connected.
“As Chi-X has now established a very successful platform in other markets, it is easy to assume that volume in Japan could pick up fairly rapidly once brokers finish establishing connectivity. More brokers are now gearing up to implement smart order routing technology in Asia Pacific,” he adds.
According to data from TSE, average daily trading volume on ”first section' domestic stocks fell to around 1.7 billion shares in August 2010 from 2.5 billion shares in January and 2.3 billion shares in 2009. (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.) PTSs account for barely 1% of overall volumes, but with Chi-X Japan having entered the market and new PTS licence-holders expected to join the competition, the TSE cannot be complacent.
Saito notes that other PTSs operating in Japan have been experiencing record highs in recent weeks. The fact that the TSE's Arrowhead, which went live on 4 January, has proved to be fast and reliable has helped build confidence, he adds. “Confirmation of the stability of brokers' Arrowhead-related technology has given brokers the comfort to turn on their smart order routing technology,” says Saito. “Many brokers were cautious about accessing PTSs right after TSE's Arrowhead rollout as their focus was more on executing clients' orders without system troubles versus offering a sophisticated trading technology. Now many of the brokers seem to be comfortable with switching on smart order routing after their systems have fully adopted the new TSE system,” he notes.
Another reason for the increased market acceptance of PTSs is the permission given to them since July 2010 to clear via the Japan Securities Clearing Corporation (JSCC), the central counterparty for Japan's stock exchanges. PTSs are also taking steps to attract more liquidity to their market. Japannext, for instance, started having its market price data distributed by Bloomberg in August.
“Central clearing has minimised counterparty risk in PTS transactions to a level that is equivalent to exchange transactions. Historically, this was one of the major obstacles for some buy-side clients to utilise PTS fully. On the clearing side, now the bottleneck has now been resolved and buy-side clients have more incentive to increase volume in these venues,” remarks Saito.