High-Frequency Traders Should Open Up, Osaka Bourse CEO Says

  • More transparency about strategies and their effects needed
  • But OSE head Hiromi Yamaji adds HFT “absolutely necessary”

Osaka Exchange Inc.’s chief executive officer has added his voice to the growing chorus in Japan calling for improved transparency around high-frequency trading.

More needs to be known about HFT firms and their practices, Hiromi Yamaji said in an interview. A registration system may be one option, he said, or a system that notified authorities about high-frequency strategies. His comments come as Japan’s Financial Services Agency looks into super-fast traders, particularly whether they contribute to market volatility and have negative effects on the long-term value of listed companies.

“It’s a question of whether we understand 100 percent what they do, there are parts that we don’t know,” Yamaji said in an interview in Tokyo. “So we need a system to help us understand in order to increase transparency in the market, in a way that’s in line with global regulations.”

Japan is one of the world’s friendliest markets for high-speed trading. The Tokyo Stock Exchange has upgraded its systems several times to enable faster buying and selling and the Osaka bourse plans to increase the speed of its derivatives trading platform this month. But the country is now catching up to regulators around the world in questioning the practice and its effect on markets. Finance Minister Taro Aso has said HFT requires closer scrutiny.

Market Survey

The Securities and Exchange Surveillance Commission sent a survey to market participants earlier this year that asked about the services brokerages provide to HFT firms. Authorities mentioned algorithmic trading in their annual administration report for the first time last year.

In 2015, nearly 70 percent of orders and about 40 percent of settled cash trades went through the co-location services primarily used by HFT, according to the Japanese bourse. Derivatives have a slightly higher ratio of super-fast trading, the exchange said.

The European Union has sought to make electronic traders more accountable, while the U.S. Commodity Futures Trading Commission, which oversees the world’s largest futures market, is drawing up a rule that would govern high-frequency traders and their trading activities.

“If you’re asking whether we have complete clarity on their trading practices, that’s not the case,” said Yamaji, whose exchange is the world’s 16th largest among those that deal in derivatives.

While Yamaji said there needs to be more transparency, he’s not opposed to HFT, which plays such a big role in his business.

“They’re a type of investor that’s absolutely necessary for the market,” he said.

HFT Effects

Japan’s Financial Services Agency is leading discussions on the quick-footed traders. During a meeting held in May, the group discussed HFT’s effects on the stability of the market, issues of fairness and lack of information on high-speed trading in Japan. The group will continue to meet, discussing other market structure topics.

Tokyo Stock Exchange’s Arrowhead trading platform processes trades at speeds more than 1,000 times faster than was possible five years ago. The Osaka Stock Exchange is on July 19 launching its new trading platform, which will also cater to investors seeking rapid buying and selling. In a bid to entice overseas investors, Yamaji said he would like to start multiple foreign-currency-denominated products by the first quarter of 2018.

Once the the new derivatives system starts, order processing latency will on average speed up to around 100 microseconds from 2 milliseconds, according to the exchange.

“Of course the system will become faster, but on top of that the capacity to take orders and execute trades will be expanded,” Yamaji said. “If you don’t get this there’s no point in upgrading.”

(An earlier version of this story was corrected to fix the launch date of the new platform and its processing speeds in 12th and 13th paragraphs.)

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