Battle for retail trading volume heats up in Japan

JPX is due to begin introducing smaller tick sizes this week, while proprietary trading systems are making technology upgrades. But do retail investors really care?
Battle for retail trading volume heats up in Japan

The battle for retail investor volume is heating up in Japan as the incumbent exchange phases in narrower tick sizes and alternative trading venues counterpunch with technology upgrades.

The Japan Exchange Group (JPX), formed via a merger of the Tokyo Stock Exchange and Osaka Securities Exchange on January 1 last year, is due to start reducing tick sizes on Topix 100 names this week.

This will be the first of a three-phase upgrade scheduled to be completed by mid-2015. The exchange is moving towards price decimilisation and by this July aims to have introduced tick sizes of ¥0.1 and ¥0.5 on stocks priced up to ¥5,000.

Tick sizes are the minimum price increment that a stock can move up or down; it sets the minimum bid/ask spread at which a stock can be bought or sold, with spread a major component of trading costs.

The exchange has also been working on improving latency (delay in data processing) to below one millisecond (a blink of an eye takes about 300 milliseconds).

To date the incumbent exchange’s tick sizes have been up to 10 times wider than those of proprietary trading systems (PTSs) such as SBI Japannext and Chi-X Japan.

With their low latency these venues have been attracting volume away from the main bourse, so this is a drive by JPX to close the gap in conjunction with regulator the Financial Services Agency.

Sources note the alignment of tick sizes for stocks trading on both JPX and the two PTSs will represent the culmination of industry players working together with the regulator to create a more level playing field.

It means that retail brokers whose trading systems were previously unable to handle decimal tick sizes will now be required to upgrade. At the same time, an upgrade would mean they will also then be able to trade on PTSs.

In Japan, margin trading – where investors borrow financing from brokers to trade stocks – is estimated to account for up to 70% of retail volume. But PTSs have so far been restricted from executing such trades.

“As more retail brokers become capable of trading in smaller tick sizes, they can send their volume to trade on PTSs,” notes Tal Cohen, Chi-X Global chief executive. “The potential savings and price improvement that retail investors can get from PTSs would hopefully lead the regulator to exempt PTSs from the ban on accepting retail margin trading.”

At the same time SBI Japannext has been working with sister firm SBI Securities to reduce latency to one millisecond. A faster market data feed is associated with better execution outcome and the ability to trade with complex algorithms.

“By reducing the latency of the market data feed reaching smart order routers, we are confident that SBI Japannext can get 15-20% additional daily liquidity from the retail clients of SBI Securities,” says Chuck Chon, chief executive of SBI Japannext.

However, despite all the efforts of PTSs to attract retail volume through technology enhancements to improve execution and lower costs, there remains some scepticism over whether retail investors really care about narrower tick sizes or faster data speeds.

“Save for a small number of day traders whose activity is similar to short-term institutional traders … [I believe] most conventional retail flows will not care that much about small fluctuations in price,” says Hiroshi Matsubara, Japan head of marketing for software services firm Fidessa.

According to Fidessa data, SBI Japannext and Chi-X Japan accounted for about 8% of the Nikkei 225 weekly trading value as at the end of last year.

Separately, last week Chi-X Global announced that JPMorgan had invested an equity stake in the company, becoming its eighth shareholder. No financial details were given.

Chi-X Global is owned by a consortium including Bank of America-Merrill Lynch, Goldman Sachs, Morgan Stanley, KCG Holdings, Quantlab Group, UBS and Instinet (a Nomura Group company).

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