Hiroshi Matsubara, Marketing Director- Japan, Fidessa speaks to Andrew Thake in the run up to TradeTech on what has been the real impact of Arrowhead on the trading landscape in Japan in the last 4 months?

Hiroshi Matsubara, Marketing Director- Japan, Fidessa (Co-chair of the Japan FPL)

TradeTech: 4 months on what has been the real impact of Arrowhead on the trading landscape in Japan?

Hiroshi Matsubara: We are really still in the early stages of arrowhead as a system, so it is difficult to make conclusions about its full impact as yet. Having said that, arrowhead is surely paving the way for future structural change of Japanese equities trading.

Needless to say, arrowhead brought in significant performance improvements for the main market trading system, and market depths now move a couple of hundred times a second. This is already impacting some segments of the domestic prop dealers who are now forced to review their investment strategies or even stop their market participation.

The volume of transactions and market data is significantly increasing and an average of 20% reduction in bid/ask spread cost has been observed. However, the majority of the traditional buy-side traders have not felt much impact to their trading work flows so far.

It is anticipated that arrowhead may have its real impact on Japanese trading towards the later part of this year, as we observe more incoming flow of High Frequency Trading liquidity into the Tokyo market.

TradeTech: Where does Fidessa see the greatest opportunity in Japan and what initiatives are you undertaking to capitalize on this?

Hiroshi Matsubara: We anticipate that this changing environment of market structure in Japan will require both buy and sell-side clients to invest in their trading systems.

For the sell-side, we will be focusing on providing our solution for HFT / low-latency trading and advanced executions services (e.g. algorithmic trading and SOR). Our strategy is to offer these solutions through our hosted platform, so that they are deployable by all tiers of the marketplace.

For the buy-side, we provide our Fidessa LatentZero product suite which meets the demand for high performance and multi-asset trading, and for highly functional compliance and investment guideline systems. This is important as domestic buy-side trading desks will face a new execution environment with tighter compliance.

TradeTech: What are the main challenges facing the Japanese institutional equity trading marketplace as we move into the second half of 2010?

Hiroshi Matsubara: When thinking about the liquidity landscape in the post-arrowhead era, it is important to consider how much liquidity will come from HFT. It is expected that a technical alliance between the TSE and OSE for their trading platforms will be key in increasing liquidity from HFT. For example, improvements in client usability such as sharing of co-location service sites and adoption of FIX will be important.

It is hard to predict whether trading volume increases in PTS and diversification of execution venues will actually happen. The deployment of a netting settlement on PTS transactions by the Japan Securities Clearing Corporation this summer can be said to be a good step forward, but it is not a fundamental solution to the problems of off-exchange OTC　trading in Japan.

After all, the direction in market regulation will continue to be a big challenge. If unbundling, the Japanese version of CSA, is implemented somehow, it will change awareness of best execution among buy-side firms and will likely trigger further re-organization among domestic brokers.

In addition, the focus on institutional trading by the FIEA (Financial Instruments Exchange Act: Kinshoho) as well as reforms for the implementation of new best execution policy, will be important. Deregulation of OTC trading, such as PTSs and dark pools, and relaxation of current restrictions on inter-fund cross trades by institutional buy-sides are also likely to impose fundamental influences on the future of the Japanese markets.

TradeTech: What do you hope to get from participating at TradeTech Japan 2010?

Hiroshi Matsubara: Participation in TradeTech Japan has become a key annual exercise for us in recent years.

I hope to catch up with my industry peers ,especially, those speakers and delegates visiting from overseas for this event, and to explore diversified views on the electronic trading market.

TradeTech: Moving forward what are your main predictions for equity trading in Japan in 2011?

Hiroshi Matsubara: The Equity trading landscape in Japan next year will depend on: a) how much new HFT liquidity is flowing in, and b) how much liquidity alternative execution venues (i.e. PTSs and broker dark pools) will gain in the rest of this year.

If we do not see those changes happening in the latter half of this year, I predict that the development of the Japanese market may be rather stuck next year.