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TSE’s Arrowhead System Lowers Trading Costs

- Updated June 30, 2010

Tokyo’s new Arrowhead trading platform has cut trading costs by more than a third, according to a report released this week by New York-based investment technology provider ITG Inc.

According to ITG, Japanese trading costs were 36 percent lower during the last two months compared to the December, falling from 49 to 31 basis points. Arrowhead, the Tokyo Stock Exchange’s third generation trading platform, was launched on January 2.

The most significant reason for the drop, said Ofir Gefen, ITG’s Hong Kong-based head of research, is that the new system allows for smaller bid-ask spreads.

“For traders who decide to cross the spread to get their orders done –which means they have to pay the difference between the best bid and the best ask price on the market — they are now paying less to do so,” he told Securities Industry News.

Gefen said the impact  has been strongest felt in large cap stock trading.

“This is where the largest cost savings have been made,” he said.

Lower executions costs is only one of the ways that brokers benefit from the new system, said TSE’s spokesman, Satoshi Mimura.

“The system also supports algorithmic trading with its low latency,” he said. According to the TSE, Arrowhead lowers the response to order acceptance to 5 milliseconds, and information distribution to 3 milliseconds, making it the fastest platform in Japan and comparable to New York and London. Previously, trading took 2 to 3 seconds.

However, it will have to take a long time for Japanese brokers, hedge funds and asset management companies to adopt electronic trading and algorithmic trading, said Neil Katkov, head of Asia at Boston-based  financial consultancy Celent LLC.  Until then, they can not take full advantage of the low latency new system.

“Electronic trading is developing much later in Japan,” he said. “It’s developing slowly and probaly will continue to develop slowly. ‘I think Arrowhead will naturally help that evolution but it doesn’t  appear to be an immediate driver of lots of technology advancement.»

Many asset management firms in Japan, Katkov said, are still using traditional fax, email and telephones to communicate with their brokers.

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