The launch of a new trading system at the Tokyo Stock Exchange (TSE) has dragged Japan's equity market into the 21st century, albeit a decade late.
After years of nagging reliability problems, stone-age connection speeds and capacity constraints that limited direct access to the exchange, the TSE has at last upgraded its technology to reduce trading costs and offer real-time access for any broker or asset manager that wants it.
The project, dubbed Arrowhead, went live on Monday and introduced a range of long overdue improvements, most important of which is the reduction of the system's latency. As online gamers know, latency (or ping) is the time it takes for a computer to get a response from a server on the internet.
Previously, investors trading in Tokyo had to wait a couple of seconds or more to hear back from the exchange's auction software - a lag that would make even online chess a tediously slow experience. Not anymore.
Based on trading activity on the first day, Arrowhead has cut latency to around 4.5 milliseconds and a simultaneous reduction in tick sizes has cut execution costs by around 25%, according to Credit Suisse.
Fears of teething problems proved unwarranted as the launch went off without a hitch on the first trading day of the year, but even so, brokers were still hesitant to be the first to trade.
"Monday was quiet because everyone was just watching," said Tomohiko Hamada, a director for equity execution and programme trading at Credit Suisse in Tokyo. "But by Tuesday lots of clients had come back and turnover was back to ¥1.5 trillion ($16.3 billion), which is roughly the average level for 2009. And, so far, there are no problems."
Although it is by no means the fastest exchange in the world, Tokyo is now quick enough to attract international investors who can take advantage of real-time price movements by using computerised trading strategies.
"There are potential clients who have never traded Tokyo before because of the capacity of the matching engine, such as high-frequency traders," said Hamada. "Some of those players are here already, but there are lots more to come. This is a good step for the market."
The speed improvement also makes it easier for brokers to offer better execution to their clients by searching across multiple trading venues, such as dark pools and proprietary exchanges, which lets them complete orders in the cheapest or most profitable way possible.
Arrowhead has also introduced almost limitless capacity and will no longer restrict access just to brokers, which means that the TSE can now sell market data to millions of clients instead of just 250 -- and, to help them take full advantage of the faster system, the TSE is now letting its members set up their servers in the exchange building itself.
The need to upgrade the stock exchange's technology has been apparent for a long time. Back in 2005, the TSE suffered an embarrassing meltdown and a series of glitches, culminating in a $330 million loss by a fat-fingered trader at Mizuho who punched in an order the wrong way around -- selling 610,000 J-Com shares for ¥1, instead of one share for ¥610,000.
Mizuho's computer system was partly to blame for not picking up the mistake, but the problem was made much worse when the exchange's system struggled to cancel the order -- a routine request that should be processed in milliseconds, but which in fact took four hours. In the end, it was quicker for Mizuho to try to buy the shares back in the market than to wait for the cancellation to go through.
Humbled, the exchange finally accepted what had been clear to market participants for years and embarked on plans to overhaul its trading infrastructure -- and its senior management. The chief executive, chief financial officer and managing director all resigned, and the other board members took a "voluntary" 10% wage cut for three months.
Those troubles are finally in the past now. Arrowhead has introduced a new era for trading in Japan and, though long overdue, that ought to be a positive development for everyone concerned.
