Beyond HFT

Last week I attended the Tokyo Financial Information Summit, put on by Interactive Media. The event was interesting from a number of perspectives. This event focuses on the capital markets; attendees are usually domestic sell side and buy side firms and vendors, including global firms active in Japan. This year there was good representation from around Asia ex-Japan as well; possibly attracted by the new volatility in Japan’s stock market. The new activity in the market was set off by the government’s Abenomics policies aimed at reinvigorating the Japanese economy. But I suspect the fact that Japan’s stock market is traded on an increasingly low latency and fragmented market structure gives some extra juice to the engine. Speaking of high frequency trading, Celent’s presentation at the event pointed out that HFT volumes have fallen from their peak (at the time of the financial crisis) and that HFT revenues have fallen drastically from this peak. In response to this trend, as well as the severe cost pressures in the post-GFC period, cutting-edge firms seeking to maintain profitable trading operations are removing themselves from the low latency arms race. Instead, firms are seeking to maximize the potential of their existing low-latency infrastructures by investing in real-time analytics and other new capabilities to support smarter trading. HFT is not dead, but firms are moving beyond pure horsepower to more nuanced strategies. Interestingly, this theme was echoed by the buy and sell side participants in a panel at the event moderated by my colleague, Celent Senior Analyst Eiichiro Yanagawa. Even though HFT levels in Japan, at around 25 – 35% of trading, have probably not reached their peak, firms are already pulling out of the ultra-low latency arms race–or deciding not to enter it in the first place. The message was that for many firms it is not advisable to enter a race where they are already outgunned. Instead they should focus on smarter trading that may leverage the exchanges’ low latency environment, but rely on the specific capabilities and strategies of a firm and its traders. Looking at this discussion in a global context, it seems interesting and not a little ironic that just as regulators are preparing to strike against HFT, the industry has in some sense already started to move beyond it.

Tokyo Roundtable 2013: The Capital Markets Revolution in Japan and Asia

Tokyo, home to Asia’s largest capital markets, is also wonderful in May, and was a perfect location for two recent Celent roundtables.

The first was Exchange Panel: Drivers of Innovation and a Market in Transition. We invited Executives from five major global exchanges; CME Group, JPX Group, Korea Exchange, NYSE Euronext, and Singapore Exchange Limited. Representatives from both Asian and global exchanges discussed changing equities derivatives market structures, business models, challenges, and opportunities in Japan’s and Asia’s capital markets.

Though similar at first glance, the exchanges from the East and West presented a marked contrast. Asian exchanges insisted that competition, diversity, and deregulation are the keys to growth. Exchanges based in Europe and the United States said they found the diversity and competition excessive; they would prefer order and market discipline. All exchanges stressed the importance of innovation and collaboration, and all agreed the distinction between investment and speculation is important.

Such differences between East and West reflect the history of the global exchange business. Differences in time and distance are shrinking as networks grow, but, ironically, the advent of global capital markets has led investors to recognize the importance of individual trading venues.

For the second roundtable, The Capital Markets Revolution in Japan and Asia, we invited the top players. From online securities companies, Monex, Inc., from buy-side, Nissay Asset Management Corporation, and from sell-side, Nomura Securities Co., Ltd. This session focused on the emerging low latency landscape and the opportunities and challenges in the region’s equities and derivatives markets. In Japan and Asia, since the introduction of arrowhead, the latency has been lowered enough and the attention has shifted to its execution quality. Technologies such as Big Data and transaction cost analysis (TCA) are the focus of their challenges.

Finally, in response to questions from audience of the venue, we asked the panelist to comment on high frequency trading (HFT). There were two comments; one was “the opportunity to get everyone used to HFT is here”, and another “HFT is welcome in Japan”.

The market environment has changed drastically. Conversion of monetary policy, “Abenomics,” and the “three arrows” were a volcanic combination. Magma flowed, but all indicators began to rise.

FIG 1:Tokyo Equities Market last six months

Tokyo Roundtable 2013_GraphSource: NIKKEI, Celent
 
These discussions will continue in New York in June. Celent will continue to explore the market trends of tomorrow. We are looking forward to meeting you again.