trading in japan: fast, familiar and flexible access to tokyo’s markets

Trading in Japan:Fast, familiar and flexible access to Tokyo’s markets

Table of Contents

Introduction .................................................................................................................. 2

Current Landscape and Trends .............................................................................3

The Costs of Co-location...........................................................................................5

The Global Liquidity Center Approach ................................................................6

Addressing Challenges of the Tokyo Markets ..................................................7

Time to Market .............................................................................................................8

Core Services ................................................................................................................9

Significant Advantages for Market Participants ............................................10

Summary ......................................................................................................................12

©2011 NYSE Euronext. All rights reserved. All third party trademarks are owned by their respective owners and are used with permission. This announcement may contain forward-looking statements regarding NYSE Euronext and its affiliates. Such statements are based upon the current beliefs and expectations of management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements.

Trading in Japan | 2

Introduction While not as mature as their counterparts in the US and Europe, major Asian markets have surpassed European markets in terms of market capitalization and value of shares traded (in USD) over the past two years. From 2009 to 2010, they experienced the highest year-over-year increase in terms of domestic equity market capitalization and share trading value *. Long ranked among Asia’s largest and most mature markets, Japanese exchanges have made particularly substantial advances in recent years. Fragmentation has enhanced the competitive environment, technology upgrades have greatly improved latency figures and market efficiency, and liquidity has been consolidated in Tokyo. While this growing level of sophistication makes the Japanese markets increasingly compelling to institutional traders, it also increases the cost and complexity of building and maintaining the necessary trading infrastructure.

With the introduction of NYSE Technologies Global Liquidity Center in Tokyo, one of the world’s most important securities markets is now far more accessible to a broader range of market participants. With a short learning curve, and exceptional flexibility, it is now possible for a broad range of market participants to enter the Japanese market, or to expand or supplement the co-located trading infrastructure they already maintain.

*Source: World Federation of Exchanges

3 | Trading in Japan

Current Landscape and Trends NYSE Technologies recently conducted a global market survey of buy- and sell-side firms, asking which markets are the most appealing targets for expansion or redeployment. Tokyo was, by far, the most-cited choice in the Asia Pacific region.

Japan is a major economy with mature markets and no significant regulatory barriers to entry. Japanese markets have ranked among the world’s top 5 markets over the past 10 years in terms of value of shares traded and market capitalization. Improvements in trading technologies have brought the Tokyo Stock Exchange’s (TSE) and Osaka Securities Exchange (OSE) latency figures on par with US and EU markets, and a new central clearing party agreement has given a boost to alternative trading venues. All of this makes Tokyo a far more compelling environment for traditional investors as well as algorithmic traders globally, and a logical first step for firms who want to expand into Asian markets. It also reinforces the need for tier-one banks to maintain a strong presence in Tokyo. New opportunities are opening up for Japanese sell side firms at home and abroad, as they gain the necessary capabilities to support the increasingly sophisticated needs of their clients.

Tokyo is an increasing appealing financial market to the global trading community:

� Fragmentation has created an enhanced competitive market: While the TSE still controls 90%* of the equity market, Proprietary Trading Systems (PTS’s) are poised to gain market share including SBI Japannext and Chi-X. In August 2010, the Japan Securities Clearing Corporation (JSCC) began offering central clearing services to these PTS, removing counterparty risk from PTS transactions. PTS trades cleared through JSCC are netted with exchange trades, improving settlement efficiency. This paves the way for increased competition in the market.

� Improved trading technology on the major exchanges: In January 2010, the TSE launched its new Arrowhead trading engine, reducing latency from several seconds to milliseconds, and the “Next Tdex+ System for futures and options trading to launch in November 2011, reducing round trip times from the current Tdex Futures system from the order of hundreds of milliseconds to a few milliseconds. Participants have reported improved bid/offer spreads and, in some instances, lower transaction costs. These enhancements improve the performance of current algorithms and enable a new set of complex proprietary strategies. OSE has also upgraded its derivatives engine, launched in February 2011, and increased its latency to micro-seconds. Other exchanges or PTS have plans to do similar upgrades: TFX, Chi-X Japan and SBI Japannext to name a few.

* Thomson Reuters Asia Pacific Market Share Report 2011 - For all Japanese equities volume http://thomsonreuters.com/products_services/financial/financial_products/a-z/market_share_reports/#tab3


� Consolidation of liquidity in Tokyo: The Osaka Securities Exchange migrated its new derivatives trading, OSE J-Gate, to Tokyo in early 2011. So, the major exchanges and most major alternate trading engines are now in close proximity.

� Extensive co-location and proximity offerings: All of the major Japanese exchanges and most PTS now have co-location and proximity offerings with multiple access points throughout Tokyo.

� A robust vendor community: A multitude of vendors offer various types of niche trading technologies, ranging from algo platforms to OMS and EMS solutions specific to the Japanese markets. Market participants have access to multiple options for virtually any product or service they require.

The Tokyo market is large and growing steadily:

NYSE Euronext (US)

NASDAQ OMX (US)

TOKYO SE

2010 Value of Share Trading (Domestic & Foreign) (in USD millions)

17,795,600 12,659,198 3,792,715

2010 Value of Share Trading (Domestic & Foreign) (in USD millions): Global Rank

#1 #2 #4

2010 Domestic Market Capitalization (in UDS millions)

13,394,082 3,889,370 3,827,774

2010 Domestic Market Capitalization (in USD): Global Rank

#1 #2 #3

Source : World Federation of Exchanges (numbers rounded to nearest whole number)


The Costs of Co-locationThe tremendous opportunities in the rapidly evolving Japanese markets are not without significant cost. Frequent changes to trading technologies have required numerous expensive and time-consuming upgrades. Technical requirements have grown increasingly complex, and vary from exchange to exchange. This complicates the already daunting task of connecting to the steadily growing new PTS. It can take several months to procure and install the necessary equipment, complete exchange certification and execute required contracts. Then the technical solution must be deployed, maintained and kept secure. These costs eat into the trading profits of the firms who have co-located in Japanese markets and present a significant barrier to entry for others who may want to try their strategies in a new market.

Building and maintaining trading infrastructure is complex and costly:

� Procuring data center space, telecommunications lines, hardware and software typically takes several months and may costs hundreds of thousands of dollars.

� Complex and expensive bandwidth, software and hardware upgrades are needed to meet the requirements of the greatly enhanced TSE Arrowhead trading engine and OSE J-Gate, both of which increased bandwidth requirements to 100MB.

� Trading firms may want to connect to multiple new PTS, and requirements are not consistent from exchange to exchange.

� Each exchange requires different levels of certification for the solution deployed.

� Infrastructure must be kept operational, secure and up-to-date.


The Global Liquidity Center ApproachNYSE Technologies Global Liquidity Centers were created to meet the demand for a more affordable and flexible way to trade in proximity to major global markets like Tokyo. The NYSE Technologies Global Liquidity Centres are fully hosted solutions that allow customers to place their software, frequently a trading algorithm, on a hosted server in a data center. Their software can then receive market data from all local markets via hosted market data, and send orders via sponsored access to all local markets. The NYSE Technologies Tokyo Liquidity Centre will offer access to the similar set of products and services NYSE Technologies customers currently use in its Mahwah (US), Basildon (UK) and other Liquidity Centers. The benefit to a customer is that, once the customer uses one of the NYSE Technologies Global Liquidity Centers, that customer then knows how to use the other NYSE Technologies Global Liquidity Centers. Perhaps even more importantly, all NYSE Technologies Global Liquidity Centers are supported and kept secure by the same teams that design and support the major trading platforms.


Addressing Challenges of the Tokyo MarketsWhile it’s clearly important for many firms to participate in the large and rapidly evolving Tokyo markets, the cost to deploy and maintain their own co-location and/or proprietary trading infrastructure can be prohibitive. The NYSE Technologies Tokyo Liquidity Centre is designed to assist in overcoming these barriers by providing fast, familiar, affordable and flexible market access.

Challenges of the Tokyo Market NYSE Technologies Tokyo Liquidity Centre Solutions

Extensive deployment and maintenance costs It typically takes 4-6 months to procure and deploy a collocated infrastructure in Tokyo, and incur extensive costs to set it up and operate it for a year.

Minimal initial commitments By reducing procurement procedures and recurring expense, and limiting the duration of commitments, the NYSE Technologies Global Liquidity Centers greatly accelerate entry to the Tokyo market while reducing the risk. Firms may save up to 20-30% in costs in comparison to deploying and maintaining themselves.

Connecting multiple markets Establishing and maintaining connections to the major Japanese exchanges is highly complex, given the disparate requirements of each. Participants may be interested in trading on just a few Japanese venues, or they may want to trade on more than ten.

Seamless connections between Japanese marketsNYSE Technologies provides the infrastructure for low-latency trading across all the major venues in Japan.

Staying current with market requirementsMajor enhancements to the TSE and OSE trading engines have necessitated an extensive series of costly and time-consuming upgrades, with more expected in the coming year.

Reduced operational costs The Tokyo Liquidity Center assumes the full responsibility for keeping your trading infrastructure up-to-date and compliant with major market requirements.

Finding qualified security and support staff It can be difficult to find qualified staff in Japan, and your internal staff may lack capacity to take on new deployments.

World-class security and supportThe Tokyo Liquidity Center is maintained and kept secure by the same team that supports the major markets. They provide:

•Monitoring•Problem resolution•Change control•Capacity planning

Technical learning curveIt can take a considerable amount of time and effort to learn the in’s and out’s of new technology services offered that are unique to the Tokyo markets.

Familiar and consistent services Familiar services, consistent from market to market, significantly reduces the technical learning curve. Every NYSE Technologies Global Liquidity Centre uses the technology services you may already use today: 1. Superfeed2. Cloud/Compute On Demand3. Risk Management Gateway4. Marketplace

Lack of FlexibilityBrokers offer some customers co-location services. However, our customers prefer a broker-neutral solution, preserving at least an aura of flexibility.

Broker access to prime sitesThe NYSE Technologies Global Liquidity Centers are broker-neutral, allowing a customer to engage multiple brokers or simply swap. This helps contain operational risk and negotiate more favorable brokerage fees.


Time to Market

Tokyo Liquidity Center services can be deployed three times faster...

Do It Yourself (DIY)

Design technical solution

Determine support model

Procurement

Installation

Testing

Pilot

Liquidity hub

Procurement

Installation

Testing

Pilot

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Month

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Month

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The NYSE Technologies Tokyo Liquidity Centre uses the exact same technology used to trade on NYSE Euronext markets today, so there’s no need to learn every technical nuance of the various exchanges in Japan. Our core services include:

� Compute on Demand (COD) offers dedicated, managed blades with pre-provisioned access to markets and application services. Windows and UNIX machines are available, both with local storage. Designed to host algorithms and supporting software, COD customers access their machines via SFTI to load various software and configurations. Customers can load software via file transfer, and configure and monitor via a TCP session or remote VPN. Customers are encouraged to take blades in multiple sites for resiliency.

� Risk Management Gateway (RMG) offers a sponsored, risk-managed gateway for order flow. It gives broker-sponsored participants the connectivity and technology needed for high-performance, pre-trade risk-filtered access to trading venues. Sponsoring brokers receive a comprehensive picture of their clients’ risk profiles, and can control and monitor their clients’ risk limits via real-time, web-based GUIs or APIs. RMG interfaces to NYSE Euronext and NASDAQ today handle heavy order flow, while adding only microseconds of latency.

� SuperFeedTM is a fully managed, hosted market data feed service. It greatly simplifies the delivery of market data from global venues, reducing latency and decreasing costs. The customer is freed from buying and operating the extensive hardware, software, and networking required by an in-house market data infrastructure.

� Marketplace now includes Metabit’s Market Liquidity Hub (MLH) NYSE Technologies’ Marketplace allows its global community of 1,400+ buy- and sell-side firms to send and receive trade information in real-time, with the connectivity model of their choice. Marketplace combines integration into all popular OMSs, fast on-boarding, and world-class support to simplify connection to 630 sell-side firms, exchanges, ECNs, and ATS venues globally. Marketplace handles all FIX versions and translation among them, while order routing enables customized FIX messaging, and support for all algorithms.This service is greatly enhanced in Japan with the acquisition of Metabit, a well-entrenched company whose products connect buy-side order flow with sell-side exchange participants. The Market Liquidity Hub (MLH) is Asia’s foremost FIX- enabled trading network providing DMA access to 14 markets in the Asian region and access to over 200 broker algos. MLH can also be accessed via the Metabit interface Xilix which is a powerful DMA trading platform enabling multi asset class trading through a single intuitive, multi-lingual user interface.


Significant Advantages for Market ParticipantsSell-Side FirmsThe NYSE Technologies’ Tokyo Liquidity Center can help sell-side trading firms meet client demands for low-latency access to rapidly evolving Japanese markets. With no capital investment or procurement delays, it provides a cost effective, flexible trading infrastructure.

Tier- One Broker-DealersDeploying and maintaining co-located trading infrastructure in Japan has become increasingly complex and expensive. Major market improvements, like TSE Arrowhead and OSE J-Gate, have required firms to institute a series of costly and time-consuming upgrades. Connecting to PTS’s can be complicated, and it can be difficult to find staff who can handle the increasing technical complexity of the trading environment. At a time when capital budgets are constrained and internal resources are spread thin, it has become substantially more difficult to meet the full spectrum of internal and external client needs.

The NYSE Technologies Tokyo Liquidity Center reduces the challenges of keeping pace with technology upgrades, managing capacity and providing dedicated support. With no need to procure new space, equipment or bandwidth, it enables customers to respond faster to changing market requirements, and to replace fixed overhead with a flexible and scalable solution. These qualities make the NYSE Technologies Tokyo Liquidity Center an attractive and effective effective way to supplement the capabilities of a customer’s internal trading infrastructure. Tier one firms might consider using the NYSE Technologies Tokyo Liquidity Center to meet the demands of a specific group of clients, or to gain fast and flexible scalability.

Tier-Two Broker-DealersWith substantial liquidity, growing competition and a vastly improved market infrastructure, Tokyo has emerged as a highly appealing market, and a logical point to enter the Asia market. However, the cost and complexity of deploying and maintaining a market infrastructure is prohibitive for all but the largest firms. The NYSE Technologies Tokyo Liquidity Center provides tier two, regional sell-side broker-dealers with the opportunity to keep pace with larger institutions. Without committing substantial capital expense or thousands of employee hours, customers can provide their clients with co-located and/or proximity access to the Japanese exchanges and PTS. It’s a highly flexible and scalable solution that allows customers to start small and expand as business grows.


Japanese Broker-DealersAdvances in trading technologies and increasing fragmentation are providing new opportunities for algorithmic trading and other strategies in the Japanese markets. To leverage these opportunities, Japanese firms must connect an intricate web of major and minor exchanges and PTS’s, to provide seamless low-latency trading services to their clients. The NYSE Technologies Tokyo Liquidity Center helps them embrace electronic trading with a minimal cost impact and learning curve. It provides a highly flexible and cost-effective solution to meet the expanding demands of domestic Japanese clients, and to attract new international clients who want to trade on the hosted services.

Institutional InvestorsThrough the NYSE Technologies Tokyo Liquidity Center, hedge funds and other institutional investors can find a cost-effective, broker-neutral platform. Without making expensive, long-term commitments, customers can explore new sources of liquidity and an expanded range of trading strategies.

Systematic TradersOver the past several years, latency figures on the Tokyo Stock Exchange and Osaka Securities Exchange have dropped from seconds to milliseconds and microseconds respectively, opening up a broad new range of algorithmic trading strategies. The Tokyo Liquidity Center provides high-frequency systematic traders with ultra-low latency access to the market. Faster deployment and low initial costs allow customers to get in and out of the Japanese markets with relative ease, while lower ongoing costs enhance the profitability of a customer’s strategies.


Consistent, Familiar and Cost-EffectiveThe NYSE Technologies Tokyo Liquidity Center provides a fast and cost-effective way to support co-located and proximity trading on the major Japanese primary exchanges and the growing PTS. With a minimal learning curve, both buy- and sell-side firms can be up and trading in the rapidly evolving Japanese markets in a matter of weeks.

� Rapid installation. A Tokyo trading infrastructure can be in place in just weeks.

� Minimal learning curve. Every NYSE Technologies Global Liquidity Centre uses the technology services you may already use today.

� Familiar, consistent services. Uses the same software, interface and services as other major markets

� Easily scalable. Start with a single blade, or even a compute-on-demand solution.

� Advanced technologies. The same technology powers low-latency trading on certain major markets.

�World-class support. The same team that protects and maintains certain major markets and local support with Japanese technical experts

For more information, contact [email protected]


About NYSE TechnologiesA division of NYSE Euronext (NYX), NYSE Technologies provides broadly accessible, comprehensive connectivity and transaction capabilities, data and infrastructure services, and managed solutions for a range of customers requiring next-generation performance and expertise for mission critical and value-added trading services. NYSE Technologies offers a diverse array of products, services and solutions to: buy side firms, including order routing, liquidity discovery and access to a community of over 630 broker-dealers and execution destinations globally; sell side firms, including high performance, end-to-end messaging software and innovative market data products delivered on a leading, reliable financial transaction network; and market venues and exchanges, including multi-asset exchange platform services, managed services and expert consultancy. With offices across the U.S., Europe, and Asia, NYSE Technologies offers advanced integrated solutions for the global capital markets community, earning the ability to power trading operations for many of the world’s best financial institutions and exchanges. For additional information visit: http://nysetechnologies.nyx.com.

trading in japan: fast, familiar and flexible access to tokyo’s markets

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