Perhaps unsurprisingly, given the Japanese reputation for electronic gadgetry, Japanese institutional equity investors are embracing electronic trading in a big way, according to a survey by Greenwich Associates.
Electronic and portfolio trades account for almost 40% of the equity trading volume in Japan but this is expected to rise to 55% over the next three years, a significant milestone.
Direct market access trading has been the biggest driver of growth over the past year, expanding from 3% of total equity transaction volume for all institutions in 2006 to 8% in 2007. DMAs share of total volume doubled from 5% to 10% for large institutions.
"DMA really seems to have been driving the growth between 2006 and 2007," says Greenwich Associates consultant Tomio Sumiyoshi. "Because it relies on the investors initiative, rather than depending on the capacity of the sales trader, DMA fits in well with the model of the typical large institution in Japan, which frequently has a relatively large number of capable traders in house."
Japanese institutional investors are keen self-traders and by 2010 expect to execute about 28% of their trading volume themselves. In 2007, they executed a significant proportion of their more complex high-touch trades electronically too. Although Japanese institutions have been rather less keen on algorithmic trading, they are nevertheless expected to increase their use of algorithms to about 13% of their total volumes over the same period.
Several trends are contributing to the rapid growth of electronic trading in the Japanese equity market, including the growing technological sophistication of buy-side and sell-side firms and an increasing focus on best execution, as manifested in investors new emphasis on lowering commission payments, and demands for minimizing information leakage and market impact. Low commission rates, anonymity, speed and low market impact were, in order, the reasons most cited by institutions for their use of electronic trading tools.
Despite the clear interest in electronic trading, alternative trading systems have yet to make a big impact in Japan, although Posit and Liquidnet, two dark pool systems, have recently reported strong growth. Chi-X, which already runs a crossing network in Japan, plans to launch its orderbook system there too, as part of its global expansion plans, which have included launches in Europe, Canada and Australia this February.