Arrowhead, the new high-speed equities trading platform launched by the Tokyo Stock Exchange (TSE) on 4 January, has significantly reduced bid-ask spreads in Japanese stocks since its launch, leading to a marked drop in trading costs, according to analysis by Japanese investment bank Nomura.
The average daily spread in constituents of Japan’s Nikkei 225 index has fallen by 25.86% on average since Arrowhead’s introduction, said Nomura, while the spread in TOPIX and TSE-listed stocks dropped 20.31% and 15.82% respectively.
The bid-ask spread reductions were particularly pronounced in the ¥2,000-3,000 price range, at 48.40%.
Nomura also noted a reduction in ‘virtual market impact’ after the Arrowhead implementation – the difference between the mid-point of the bid-ask spread and the price at which an order is filled. The bank argues virtual market impact is a good measure of trading costs because it includes both the bid-ask spread and the effects of limit orders on the order book’s evolution.
Average daily virtual market impact fell 23.54% in Nikkei 225 stocks for orders with a notional value of $250,000, 10.29% for orders with a notional value of $1 million and 12.52% for orders with a notional value of $2 million. The corresponding reductions for TOPIX stocks were 26.85%, 24.38% and 26.53% respectively.
Nomura pointed out that the reductions in virtual market impact were less prominent in larger orders than smaller ones, which it said reflects the relative concentration of liquidity in order books for TSE stocks, a phenomenon Arrowhead may not have changed significantly.