n Chapter 10
Market report — Japan

Improving execution results
utilising PTS venues
Chuck Chon*T

he most significant difference
between the primary exchanges,
such as the Tokyo Stock Exchange(TSE) and Osaka Stock Exchange(OSE) and PTS venues, such as SBIJapannext (JNX) and Chi-X Japan,
is the difference in tick sizes. WithTSE and OSE, the minimum ticksize is ¥1, whereas the minimum
tick size of PTS venues is ¥0.1 or
1/10th of the primary exchanges.
Due to the tick size difference,
institutional and retail investors
can gain tremendous improvement
in execution results, realising anadditional 30-40bps on many widebid/ask spread blue chip stocks,
such as Mizuho Financial Group(Mizuho) – as shown in Figure 1.
Figure 1 clearly shows that theprimary exchange’s bid/ask spreadof 115/116 for Mizuho is 86.6bps
wide, whereas the JNX bid/ask
spread of 115.1/115.5 is only
34.7bps wide. This difference inspread for Mizuho at JNX is quite
compelling and anyone interested
in improving execution results
should not ignore this fact.
For wide spread names such asMizuho, it certainly pays to makeuse of PTS venues. For example,
as indicated in Figure 1, if a buyer
and seller cross at a mid-point asindicated by ‘n’ in Figure 1, thensavings for the buyer and seller are
43.3bps each when compared tocrossing the spread on the primaryexchange. Having the ability to
reduce the tick size to 1/10th gives
market participants an inherent
ability to trade at mid-points that are
fairer for both liquidity providers andtakers alike. This is a far-reachingdevelopment in the Japanese equities
market and, perhaps, a prelude toan inevitable change to the trading
landscape across Asian markets.
In other developed markets such as
in the US and Europe, decimalisationand smaller tick sizes are the norm.
However, in Japan this opportunity
did not exist until JNX first
introduced 1/10th tick size of TSE
to its members on 28 October 2008,
when it spearheaded and launched
the daytime side-by-side market
to compete with the incumbent*
exchanges. Decimalisation of theChuck Chon,
andJapanese equities market is arguably co-CEO
representative
director,
the single greatest contribution
SBI Japannext
made by JNX and is to a certainn Algorithmic trading & the search for liquidity in Asian the trade asia 201195

n Chapter 10
Market report — Japan

12,0006,000JapanNext BBO spread (34.7 bps)

4,000

1
5:0

0

14:3

57

51
4:
Exchange
best bid

4:

Exchange
best ask:3

JNX
trade14JNX
best bid

14:3
14

4:

:3
14

JNX
best ask

:3

44

39
4:

35
4:
:3
14

4:

31

2,000

JNX
traded quantity

Source: Market data via THOMSON REUTERS in September 2011

extent responsible for triggeringfragmentation in earnest in theJapanese equities market.
For those unfamiliar with theJapanese equities market, reducing
the tick size to 1/10th of the primaryexchanges’ may sound obvious andtrivial. However, the decimalisationof tick sizes required JNX members
to undertake a high level ofinvestment and the allocation ofsignificant resources to retrofit theirsystems to handle decimal numbers.
The retrofit projects took up to six
months for some members and insome cases incurred costs of overhalf a million dollars.
To date the vast majority of mid- tosmall-sized local brokerage houses
and many online securities firms inJapan – with the exception of Japan’s
leading online securities firm SBI
Securities – are unable to handle
decimal numbers. As a result, themajority of local brokerage firms
are still not able to access the priceimprovement readily available
on PTS venues for their clients.
That said, with increased sales andmarketing campaigns by PTS venuen Algorithmic trading & the search for liquidity in Asian the trade asia 2011

Traded volume (shares)

8,000:3

4::3
1496

10,000Exchange BBO spread (86.6 bps)

14116.4
116.3
116.2
116.1
116.0
115.9
115.8
115.7
115.6
115.5
115.4
115.3
115.2
115.1
115.0
114.9
114.8

25

Japannext price ¥FIGURE 1: Japannext Best BID/ASK VS TSE – Case of MIZUHO FG (8411)

n Chapter 10
Market report — Japan

FIGURE 2: Japanese Market Volume Breakdown
100890TSE (% market share)

670

560

45040

330220

1

1000

PTS and OSE (% market share)

780-1
Jan-11

Feb-11

TSE market

Mar-11

Apr-11

May-11

Jun-11

PTS (JNX + Chi-X + KABU)

Jul-11

Aug-11

Sep-11

OSE market (Osaka + JASDAQ)

Source: Market data via THOMSON REUTERS & JSDA PTS Infomation Network

operators in Japan, via public andprivate fragmentation forums,investment seminars conductedby PTS member brokers, media
coverage of PTS venues, and by wordof mouth, momentum is gatheringpace. Many indigenous mid-sizebrokerage houses and online
securities firms are now evaluating
their systems with a view to handling
decimals and are enquiring after
membership of the JNX.
Confirmation of the depth offragmentation in the Japanesemarket came recently from aNikkei newspaper article, whichhighlighted that combined PTS
market share had surpassed
the OSE in August for the firsttime since PTS regulation wasintroduced in 1998 (29 September
2011 edition in Japanese, see
Appendix I). The article pointed to
the fact that the combined market
share of the three PTS venues, kabu.
com, Chi-X, and SBI Japannext,
surpassed the combined turnoverof both the OSE and JASDAQ. In
terms of value, the combined PTS
turnover stood at US$16.5 billion,n Algorithmic trading & the search for liquidity in Asian the trade asia 201197n Chapter 10
Market report — Japan

FIGURE 3: Japannext Monthly Average Improvement
Number: Average improvement (bps)Sell price equal to BB on primary exchange (%)

Sell price better than BB on primary exchange (%) 98.1%: Average % (better + equal)
10080
%

60

7.13

9.49

8.55

8.95

10.07

8.87

01

6.43

20

1140
9.52

11.06

Se

p20

1111
Au

g20

1
Ju
l-2

Ju
n20

11M
ay-20

Ap

r-2
0

11

11M
ar-2
0

11Fe
b20

Jan20

110

Number: Average improvement (bps)Buy price equal to BO on primary exchange (%)

Buy price better than BO on primary exchange (%) 97.7%: Average % (better + equal)
100

9880%

60

6.91

10.89

8.50

116.64

20

1140
7.81

9.48

8.76

9.52

10.85

1111Au
g20

p20

11Ju
l-20

Se

11Ju
n20

11M
ay-20

Apr-20M
ar-20

11Fe
b20

Ja
n-20

110

Source: Japannext monthly statistics in September 2011

compared with US$14.9 billion for
the OSE and JASDAQ.
Figure 2 provides a breakdownof Japanese market volume andclearly highlights the accelerated
growth of market share amongstPTS venues. In January 2011 thecombined market share of PTS
venues amounted to no more than2%, rising to 5% by August.

PTS venues, such as JNX, arebenefiting market participants byconsistently delivering improvements
in execution results. Figure 3 showsthat the execution ratio for JNX
participants consistently improvedin more than 80% of cases. For
example, in September 2011, theaverage improvement on ‘sells’ was11.06bps and on ‘buys’ 10.85bps.

n Algorithmic trading & the search for liquidity in Asian the trade asia 2011

n Chapter 10Market report — Japan20020180

1816016140

14
Trend line of TSE volume120

12100

1080860

6404
Trend line of Japannext market share202M
ay-116Ju
n1120-Jun114Jul-1
118-Jul-1
11-A
ug-1115-Aug-1129-Aug-1112-S
ep-1126-S
ep-1123-

M
ay-119-

Ap25-

-A
11r-1
10

pr-110Japannext market share versus TSE (%)

TSE volume (million shares)

FIGURE 4: Japannext Market Share – Case of Mizuho FG (8411)

TSE volume (millions)Japannext market share (%)

Source: Japannext Weekly Statistics in September 2011

Once again using the exampleof the blue chip bank stock
Mizuho, JNX’s market share ona daily average basis is around
8% of the TSE’s total volume
traded for Mizuho (see Figure 4).
Interestingly, with increased PTS
market share of Mizuho stock, one
would naturally assume that TSE’s
volume would drop by the sameratio. However, the data seems toindicate that this is not a zero sum
game. If we were to look at TSE’s
turnover of Mizuho stock in termsof the number of shares tradedat both venues, TSE’s number ofshares does not seem to indicate adecrease by the same factor as theincrease of JNX’s number of shares.
It is somewhat difficult to provethat PTS venues have the effect ofincreasing the size of the overall
pie on a down trend market, but
looking at the graph in terms ofshares traded at TSE versus JNX,
it is obvious that they are highly
correlated and the trend lines ofboth venues indicate a rise in thenumber of shares traded at therespective venues. It is possible thaton a wide spread name such asMizuho, market participants mayn Algorithmic trading & the search for liquidity in Asian the trade asia 201199

n Chapter 10
Market report — Japan

FIGURE 5: Japannext Participant Break Down of Mizuho FG(8411)

Agency: 67.1%
Proprietary: 11.3%
Retail: 21.5%

Source: Japannext monthly statistics in September 2011100

be doing some arbitrage between
the two venues and thereby
increasing the overall size of the pie.
Figure 5 shows the participant
breakdown of Mizuho at JNX. From
this it can be seen that the retail shareis 21.5%, agency share is 67.1%, andprincipal share is 11.3%. The figureof 11.3% principal participation ismuch lower than the TSE’s official
30% HFT participation.
On average, for wide spreadnames such as Mizuho, 99.9% of
the duration of the side-by-side
market with TSE bid/ask spreads
are inside the TSE’s bid/ask quotes.
This is a remarkable achievement
made possible by giving the market
means to split ¥1 minimum ticksizes into even smaller ¥0.1 tick size

increments. This results in significant
savings for market participants thatwould otherwise be unattainable on
the primary exchanges.
In summary, while the current
downward trend in global equities
markets tempers optimism, as with
the US and European markets,
the fragmentation of the Japaneseequities market promises to deliver
better execution results for marketparticipants. This can only help inassuring positive results for PTS
venue participants. And it is only amatter of time before the mainstream
investment community starts
demanding access to PTS venues
once they realise the significant
savings and trading opportunities
they are missing out on. nn Algorithmic trading & the search for liquidity in Asian the trade asia 2011

n Chapter 10
Market report — JapanAppendix I: Nikkei newspaper article detailing combined PTS market share(29 September 2011)

101n Algorithmic trading & the search for liquidity in Asian the trade asia 2011