Instinet’s JapanCrossing crossing network and CBX dark liquidity pool are at present the only active alternative trading venues to the Tokyo Stock Exchange. JapanCrossing runs scheduled matches several times a day, while CBX is a continuous matching system that runs on the same platform as Chi-X, the pan-European ATS launched by Instinet last year.
Although neither has yet posed a serious threat to the TSE, increasing frustration with the exchange’s technology, which last year suffered embarrassing glitches, has acted as a catalyst, helping to quadruple volumes on JapanCrossing to 2% of the TSE total.
"JapanCrossing has been running since 2001," says John Fay, co-CEO of Instinet, "but it has taken a long time to sell the message of better execution to domestic firms because there is no history or experience of alternative trading venues.
Real liquidity
"We started by making inroads with foreign firms but the real liquidity in Japan is with the domestic brokers. That has finally started to take off now largely because of the inefficiencies of the Tokyo Stock Exchange, which is suffering from severe capacity constraints and high latency, leading to a very slow market. There were periods in the spring last year when the market had to close early to handle the volume. The exchange is making a huge investment to correct the problems but in the meantime brokers and investors are looking for alternatives."
Instinet’s next move is to capitalize on parent Nomura’s market share. Nomura, the largest brokerage house in Japan, accounting for 15% of the volume on the TSE, is set to begin seeding Instinet’s Japanese alternative trading systems with its order flow, which will significantly improve volumes and execution rates.
Manual
JapanCrossing and CBX, the dark liquidity pool launched last year, are also expected to benefit from a change to onerous trade reporting rules that had seriously handicapped the system. Before the second half of last year, all trades had to be reported manually, even though they were executed electronically.
Instinet also has plans to launch a crossing network in Korea before the end of the second quarter of 2007. The introduction of the system could have a big impact on institutions in Korea because it will enable them to trade in size exclusively among themselves for the first time. The Korean equity market is 80% retail and institutional investors are handicapped by the fact that retail investors know when they are trading against institutions.