Tick-size reform denting Japan HFT: Mitsubishi UFJ AM

While doubts over the ability of Abenomics to revive Japan’s economy have been blamed for the Nikkei 225 index’s year-to-date decline of 4.88%, trader Yasuaki Sumimoto* said Tokyo Stock Exchange reforms could be partly responsible for subdued activity.

With as much as 60% of cash equity trading volume in Japan linked to high-frequency strategies, Mitsubishi UFJ Asset Management head trader Sumimoto believes high-frequency traders may have moved to the sidelines during the first two months of 2014 to reassess their strategies following reductions in tick sizes introduced by authorities earlier this year.

For Topix 100 stocks priced at ¥3,000 or below, tick sizes (the minimum price increment a stock can move up or down) were cut to ¥1 on January 24. A more full-blown reduction is due to come into effect on July 22, when Tokyo Stock Exchange, the cash market operator of the Japan Exchange Group (JPX), is set to introduce tick sizes of ¥0.1 and ¥0.5 on stocks priced up to ¥3,000 and ¥5,000, respectively, the first time they will have dropped below ¥1.

“On average, we trade 50% to 70% of our monthly orders through algorithmic trading or via direct market access,” said Sumimoto. “We believe the presence of high-frequency traders in the market is good for liquidity in general. We do not think they are negative at all to the normal price-discovery process.”

Mitsubishi UFJ Asset Management, which has $58.8 billion in AUM, has made changes to its order management system to be able to handle trading in decimal tick sizes. It has been trading on alternative venues, or proprietary trading system (PTS), since November 2012.

Sumimoto’s team also uses brokers’ internal dark pools. For highly liquid stocks his team will generally use execution algos such as volume-weighted average price (VWAP), or time-weighted average price (TWAP).

“For illiquid names, we will use Direct Market Access [DMA] and the trader will monitor the execution,” says Sumimoto. “If we use VWAP to trade illiquid names, when our trading volume is high relative to the volume trading in the market, we believe the market impact of using such an algo benchmark will be higher.”

* The full interview appeared in the June issue of AsianInvestor magazine.