Faster Japan Trading Predicted by Broker Girding for Shift

SBI Securities Co., Japan’s largest online broker, upgraded its technology in anticipation of faster trading speeds in the world’s second-biggest equity market.

SBI purchased a high-speed data feed this month from MarketPrizm, said Yoshitaka Kitao, president and chief executive officer of Tokyo-based parent company SBI Holdings Inc. This will let SBI customers get pricing information and execute trades faster on both the Tokyo Stock Exchange and the venue run by sister company SBI Japannext.

Japan Exchange Group Inc., formed this year by the merger of the country’s biggest stock and derivative markets, is cutting the minimum price increment for 100 of its biggest stocks next month. A similar shift in the U.S. more than a decade ago reduced profits for human traders, fueling the rise of high-frequency trading firms whose automated systems made money despite the narrowed gap between prices to buy and sell. Kitao said SBI is preparing for more high-speed trading.

“I am certain that other Japanese brokers are considering moving into the HFT space,” Kitao said by e-mail on Dec. 11. “Online brokerages need to evolve.”

Major Exchanges

Japan Exchange Group CEO Atsushi Saito said in May that some Japanese stocks would see smaller tick sizes starting in January, an attempt to reduce investors’ costs, boost liquidity and bring them more in line with practices of “major exchanges overseas.” Only stocks on the Topix 100 index, comprising the country’s biggest companies, will take part in the test of narrower tick sizes.

Stocks in Japan don’t all have the same tick sizes. Usually, the minimum increment is about one-thousandth of the stock price, with the smallest tick being 1 yen for shares priced less than 3,000 yen and the largest being 100,000 yen for companies above 50 million yen. Starting in January, ticks for Topix 100 stocks priced above 30,000 yen will be reduced by a factor of 10.

Japanese Shift

The Japanese shift comes as the U.S. debates whether to widen ticks for smaller companies. Representatives from American exchanges, brokers, mutual funds and regulatory agencies held two conference calls on Dec. 3 to discuss concerns about market structure, including tick sizes, two people with knowledge of the matter told Bloomberg News.

Compressing U.S. price increments reduced profits for human market makers and helped drive the ascent of automated firms known as high-frequency traders, who now account for about half of American equity volume, according to data compiled by Tabb Group LLC. Supporters of larger price increments argue it would make trades more profitable for market makers, encouraging more transactions in smaller stocks.

Some Benefit

“Actively traded securities generally benefit from a lower tick size, whereas liquidity in infrequently traded instruments is adversely affected by a tick-size reduction,” according to a study last year from the University of Wollongong in Australia, which examined the effects of a 2005 tick-size reduction in Hong Kong.

If the first phase of Japan’s tick change is successful, price increments for Topix 100 companies trading under 5,000 yen could be reduced. The pilot program will be followed by a comprehensive review to determine the best pricing method, with revisions implemented in mid-2015, according to a May statement from Japan Exchange Group.

Investors in Japan can already trade in smaller increments when using the country’s only two alternative trading platforms that display prices, SBI Japannext and Chi-X Japan Ltd., according to information from each of their websites. The main exchange is battling for market share with the new venues, which have grabbed 6.4 percent of trading as of last week, according to data compiled by Surrey, England-based Fidessa Group Plc.

Smaller Brokers

“We welcome smaller tick sizes for SBI Securities’ online retail members by virtue of the fact that smaller tick sizes offer significant economic benefits for retail investors,” Kitao said. “However, for the market as a whole, the majority of smaller brokerage houses and smaller online brokers will need sufficient time in order to adapt their trading ecosystems to a smaller tick size market.”

Part of their competitive advantage has been providing a tighter spread between bids and offers through smaller tick sizes, giving clients the potential better price than could be achieved on the main exchange.

Decimal Pricing

“Vendors will now be able to process decimal pricing, which will attract domestic brokers” to proprietary trading systems, Mak Nagahori, head of sales at Chi-X Japan, said in an e-mail today.

The broader Topix index rose 44 percent this year through last week, the most among 24 developed markets tracked by Bloomberg. The gauge is on course for its biggest annual advance since 1999 as Prime Minister Shinzo Abe and the Bank of Japan seek to end 15 years of deflation. SBI Holdings has outperformed the measure, gaining 87 percent this year to 1,428 yen through Dec. 13.

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