Trading on Technology

David Wilkinson

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Japan has long been famous for its technology excellence. Indeed, it is so ingrained in the national consciousness and culture; it has even spawned a new form of the traditional 17-syllable haiku poetry.

Take this evocative example from the website haikuadaydiary.com:

My fingers talk

My eyes listen my head makes it up

My heart hungers

However despite all this, the country has been somewhat conservative in developing its financial services industry. Still, with recent regulatory reforms and market structure updates, the country has a lot to offer to traders looking to expand in the Asia-Pacific region.

Don’t underestimate the world’s third biggest economy

At first glance, Japan might appear less welcoming to international participants than some of the other large markets in the region like the Singapore Stock Exchange and the Hong Kong Stock Exchange, which have a higher proportion of listed foreign stocks. Japan’s economy is the 3rd largest in the world and the country has nurtured numerous homegrown, internationally competitive corporations. The Japan Exchange Group (JPX) – Japan’s main exchange operator, also ranks an impressive third place globally in terms of largest stock exchanges by market capitalization.

It took Japan some time to catch up with other developed markets in its low latency offerings. Low latency trading was finally available in Japan after the Tokyo Stock Exchange launched its Arrowhead trading system in 2010. It has been growing in volume since then to peak at 50% of all trading volume in September 2012.

Recently, some trading, mostly proprietary in nature, has moved from Japan to Hong Kong and Singapore. But the Japanese government and regulators are now determined to reverse that trend and promote the development of Japanese capital markets.

As a step in that direction, in 2012, the regulators approved the merger of the Osaka Stock Exchange and the Tokyo Stock Exchange into JPX to create a strong, diversified and globally competitive platform. The exchange itself is constantly updating its offerings such as upgrading the Arrowhead trading system and launching new derivatives products.

Japan will undoubtedly face strong competition in the next few years from other Asia-Pacific capital markets in attracting global traders. But it already offers a compelling package. Its capital markets are among the biggest in the world, up-to-date infrastructure is in place and two of the main stakeholders – government and JPX – have set their minds to continuously make the country more welcoming to traders from abroad.

One thing is certain: international traders will remain important for Japanese capital markets for the liquidity and trading fees they bring. Japan, in turn, will remain important for international traders as a source of diversification and deep liquidity.

Advanced technology offers an edge

The Japanese trading ecosystem is quite technologically advanced; electronic trading represents much higher volume of trading in Japan than in some other markets where legacy systems impede the development. The situation will soon be even better, thanks to a brand new US$43 million data center being built in the middle of Tokyo by Equinix.

Called TY5, the new facility will meet strong demand from a variety of info-centric industries – including financial services firms and cloud and content providers – keen to access Equinix’s data center and interconnection services.

Located near Tokyo’s financial district, TY5 is in close proximity to both the Japan Exchange and the Tokyo Commodity Exchange. Or, looking at it another way, it is right next door to where over 3,400 listed companies with a total market capitalization of US$4.47 trillion do business.

Being in such close proximity to these exchanges, when it opens in the first quarter of 2015, TY5 will provide financial services companies with reliable, low-latency connectivity to key financial institutions and business partners, boosting speed of trading and accelerating business outcomes.

Positive future prospects

The biggest factor driving or limiting trading growth is, of course, the Japanese economy. Therefore, realistically I expect Japan to see average rates of expansion in trading.

That said, a solid pace of development, secured by such factors as steady deregulation, technology and connectivity infrastructure investment, and a healthy market structure mean that the prospects for Japan’s economy are still very positive.

Interested to learn more? Check out our new report ‘Trading in Japan’ developed in conjunction with KapronAsia.

David Wilkinson
David Wilkinson Senior Director & Asia Pacific Lead, Global Vertical Marketing