The Gateway to Algorithmic and Automated Trading

Muscle and Speed

Published in Automated Trader Magazine Issue 31 Q4 2013

You would think the tech-savvy nation of Japan would be leading the way when it comes to algorithmic trading. In fact, it's decidedly lagging. But things are changing and one of the world's most developed markets is finally getting serious about automation. Mary-Ellen Barker reports.

MUSCLE and SPEED

Japan is one of the world's top three capital markets, powered by the world's third -largest economy. And that giant economy is roaring along, logging a third straight quarter of growth in September and set to achieve Prime Minister Shinzo Abe's prediction that Japanese growth this year will create the equivalent of an economy bigger than Israel's. The mountain of cash held by Japanese companies hit a new record of $2.4 trillion earlier this year, a figure Bloomberg News notes is bigger than the Italian economy and bigger than the liquid assets held by US companies.

So why has Japan been punching below its weight in volumes and development of algorithmic trading? Market participants blame the absence of the aggressive regulation that has triggered profound changes in North American and European markets by forcing through structural reforms that have driven the revolution in trading technology.

"The adoption of algorithmic trading has been slow in Japan compared with the rest of the world and even compared with other Asian countries," said Keith Ducker, CIO of Asian electronic trading platform TORA. It's growing, he said, but at a relatively slow pace, with Japan relatively lacking in more sophisticated algorithmic trading. "More than 75% is VWAP," he said. But some large firms are building their own algorithms, he says, and Japan is also seeing some sophisticated pair trading, mainly option/equity pairs.

Other observers blame trading venues rather than the buy-side for the slow uptake. Japan has lagged, according to ABN AMRO Tokyo Clearing CEO Sean Lawrence, because exchanges have been slow to upgrade their technology on matching engines, and local brokers and banks have been reluctant to invest in new technology. "Automated trading remained the preserve of foreign banks and proprietary trading firms well beyond the expected timeframe for this mode of trading to evolve in Japan," he said.

David Wilkinson, Equinix

David Wilkinson, Equinix

"If you look across Asia, it's a bit of an anomaly"

"If you look across Asia, it's a bit of an anomaly," said David Wilkinson, senior director of financial services business development at Equinix Asia-Pacific. "Japan has a largely deregulated environment with multiple trading venues, which should make it attractive for algorithmic trading - and for trading in general. But uptake [of algorithmic trading] is mixed, and certainly compared to North America and Europe, it's not as prevalent."

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