TSE's arrowhead, brokers' systems stand firm after earthquake

The Tokyo Stock Exchange and brokers said their trading infrastructure continues to operate soundly despite the huge volumes and spike in volatility following the earthquake that shook Japan on 11 March.
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The Tokyo Stock Exchange (TSE) and brokers said their trading infrastructure continues to operate soundly despite the huge volumes and spike in volatility following the earthquake that shook Japan on 11 March.

A TSE spokesman said arrowhead has had adequate capacity to handle the spike in volumes to date, adding that he sees no need to increase capacity as this point. “Arrowhead is operating safely and efficiently and there's been no trouble,” he noted.

Brokers also confirmed that their platforms had withstood the surge in traffic. “There's been no impact from the market turbulence other than increased volumes. We saw huge volumes over the last few days of trading in Tokyo, but our system has been built to handle this,” one broker said.

The TSE and Osaka Securities Exchange were both unaffected operationally on 11 March following an earthquake that measured 9.0 on the Richter scale and hit the Miyagi prefecture, 250 miles from Tokyo at 14.46 JST (05.46 GMT). The Nikkei 225 index closed down 179.95 points – or lower 1.72% – at the close of trading on 11 March. This week, the Nikkei has seesawed from a 6.18% loss on Monday and a further 13% plummet on Tuesday to a 5.7% rebound on Wednesday.

While most brokers report an increase in trading volumes in the order of three to five times volume post-earthquake, this is still within their capacity that is generally set at around 10 times their typical volume. Most said they are able to fall back on their business continuity plans with solid back-ups in terms of data centres, servers, market data feeds and lines to exchanges.

“Japan's trading infrastructure took a quantum leap forward with the TSE's introduction of arrowhead and the co-location services. With spikes in volumes historically on the old system, we would have definitely had disruptions,” said Keith Ducker, chief investment officer of trading technology provider and agency broker Tora Trading. “Seeing what happened in Japan over the last several days, the efficiency with which the market has handled this crisis is a testament to the focus of the TSE and Japan in general on infrastructure, which has really paid off.”

The advantages to the market of having limit tick movements and circuit breakers throughout the entire Japanese system, and not just on an index or macro level, have been revealed post-earthquake, Ducker added. “When you have a crisis and dislocations in markets, that's a huge benefit. There's a structure in place that can handle crisis more effectively than other markets globally. The ability to handle volumes is another benefit,” he noted.

Arrowhead, alternative trading platforms and dark pools in Japan have been inundated with sell orders as the impact of the earthquake became more evident and concerns grew over radiation leaks from the Fukushima Daiichi Nuclear Power Station.

Ducker explained, “Our job is to provide the technology for buyers and sellers to come together and in situations where there are few buyers, you're going to see the market move lower. There is a point in which liquidity will emerge and buyers emerge. That's price discovery.”

The TSE issued a statement on 15 March saying, “The Tokyo stock market has been experiencing sharp drops over the last couple of days. This has mainly been caused by increasing concerns about the degradation of social infrastructure following the recent earthquake and subsequent nuclear power plant accident. Market participants' concerns have also been further accelerated by the conflicting information on these happenings. However, the overseas media still appreciate the potential power of the Japanese economy, even after the recent earthquake. In fact, the trend in the stock market today and yesterday showed that foreign investors were the net buyers.”

On 25 February 2011, the TSE published a report, ”TSE Equity Market Summary after arrowhead Launch', that provided a one-year review of arrowhead's performance. The report noted that the TSE has achieved the first target of its arrowhead development project in terms of speed and reliability over the past year. The platform was designed to realise availability of 99.999% and this was achieved by processing trading data such as order, execution and order information data on triplex servers. Arrowhead's triple redundant configuration ensures that no information is lost even if one node fails, because the other two nodes are synchronised in real time with the same information. The system is equipped with the function to perform an emergency transfer to alternative processing servers to secure a high level of system security in order to maintain smooth trading.

Since its launch on 4 January 2010, arrowhead has recorded an average order acceptance response time of two milliseconds, against a targeted 10 milliseconds. The order response time before arrowhead was two seconds. The report also noted that there had been no market interruption and no need to expanded capacity during the past year.

Author: Jill Wong