The migration of futures trading to the Tokyo Stock Exchange’s Tdex+ platform on 21 November is expected to attract greater high-frequency flows, while the extension of trading hours should boost foreign and retail investor interest in its derivatives products, said Atsushi Santo, executive account manager, market business development.
From 21 November, the Tokyo Stock Exchange (TSE) will extend its evening trading session for derivatives to 11.30pm, from 7pm currently for TOPIX futures and 6pm for Japanese government bond (JGB) futures. “The key to success for the exchange business, especially in Japan, is retail order flow. If we look at other Japanese exchanges, trading activity slows down in the evening up to 7-8pm, but then increases up until midnight. This suggests the retail client works during the day, gets back home to enjoy dinner with his family, and then restarts trading up until midnight. Also, the extension will offer further trading opportunity to foreign investors,” Santo said.
TSE launched its Tdex+ derivatives trading system in October 2009, followed by its arrowhead cash equities platform in January 2010. Tdex+ currently supports only options trading, but futures trading will be migrated to the platform on 21 November. The original legacy system for derivatives trading had processing time of about 20 milliseconds for options, but Tdex+ has improved order-processing response to six milliseconds. Tdex+ also includes new functions such as the market maker function and strategy trading. The legacy futures matching engine has an order response latency of 100 milliseconds on average, but this will be reduced to five milliseconds under Tdex+.
In line with the system migration, TSE will extend its market-making programme to futures contracts, mainly targeting mini-TOPIX futures and mini-JGB futures. IT has already recruited 34 market makers and risk takers for mini-TOPIX futures and 25 for mini-JGB futures. “The market-making programme will apply to most TSE futures products other than the big TOPIX futures or big JGB futures because we already have liquidity in them. But for other products, we believe there is room for expansion,” Santo added.
In September 2011, more than two million TOPIX futures contracts were traded in total, while the number of mini-TOPIX futures total 21,178 for the same month. TOPIX is the composite of all common stocks listed on the first section of the TSE. TOPIX futures were first listed on 3 September, 1988 and have attained high liquidity. Mini-TOPIX futures are one-tenth the size of TOPIX futures and are designed to offer more convenience and meet smaller needs.
TSE will also introduce a closing auction to execute uncrossed futures orders at the end of each session. A dynamic price limit designed to prevent ‘fat finger’ incidence – large price jumps and orders from being placed mistakenly at an unreasonable price – will also facilitate futures trading under Tdex+.
From 21 November, large Japanese online trading firms will also start to offer TSE’s derivatives products to retail clients. “Since we made the announcement early this year to migrate futures contract to Tdex+, the online firms decided to route to the next-generation matching engine from the outset,” Santo noted.
TSE is keen to attract more high-frequency trading (HFT), particularly through the provision of low-latency co-location services. Since May 2009, the TSE has been providing co-location services at its primary site. “Once we complete the migration, we expect several HFT type of order flow to start coming into our exchange,” he added.
On the cash equities side, TSE will in January 2012 replace servers of its arrowhead matching engine for cash equities to further improve order processing latency. “Generally speaking, when there’s an enormous amount of order flow into a single issue, slightly higher latency might be observed. We believe our enhancement will decrease its frequency,” Santo explained.
In May, TSE will replace arrowhead’s messaging server to decrease the order response latency. “At this moment, official latency of arrowhead is two milliseconds and we believe we can decrease it to maybe one millisecond or less,” he added.
Tdex+ is based on the LIFFE CONNECT platform that has supported trading on the London International Financial Futures and Options Exchange (LIFFE) since November 2000. The Tdex+ and arrowhead systems share a common network housed in the same data centre.
Author: Jill Wong