participants ’ trade execution strategies have changed dramatically. high - frequency trading has come to have a greater presence. high - frequency trading can be considered as a type of trading strategy similar to market making and short - term liquidity provision. various execution strategies, derived and devised from the experience of traders and the results of computationally intensive research, have been transformed into computer algorithms and offered to various investors in the financial market. these changes have enabled institutional investors to take advantage of cutting - edge tactical executions. depending on market conditions, many of the algorithmic trading strategies slice block orders into smaller child orders, to avoid the price changes caused by block - order executions, that is, so - called market impact. the expansion of algorithmic trading is leading to fundamental changes in the market : for example, orders are smaller but more numerous than before. this development in market microstructure has had a positive impact on market functioning, improving investment performance per risk capital through the reduction of transaction costs. in fact in the u. s. market, where algorithmic trading started earlier than other places, it has reduced market - making costs and narrowed bid - offer spreads significantly. 7 moreover, recalling that algorithmic trading strategies for block trades are designed to reduce their see table 2 in chaboud, a., b. chiquoine, e. hjalmarsson, and c. vega, 2009, “ rise of the machines : algorithmic trading in the foreign exchange market, ” board of governors of the federal reserve system, international finance discussion papers, no. 980. co - location is a service that allows market participants to install their devices at data centers of trading venues to minimize the physical distance between data centers and market participants ’ devices. according to the tokyo stock exchange. see figure 1 – 3 in hendershott et al., 2009, in footnote 2. there is an empirical study on the reduction of transaction costs as a result of mtf expansion in the recent european markets. for details, see brandes, y. and i. domowitz, 2010, “ alternative trading systems in europe : trading performance by european venues post - mifid, ” journal of trading, 5 ( 3 ), pp. 17 – 30. market impact, an empirical study has shown that this type of algorithmic trading contributes to stabilizing intra - day realized volatility. thus, algorithmic trading may help stabilize market prices, under normal circumstances and most of the time

and currency markets of major industrialized countries. as much as 60 to 70 percent of the amount traded in the united states, 2 and some 50 percent of that traded in europe, 3 is executed the following is partly based on sugihara, y., 2010, “ approaches of market participants for the reduction of transaction costs : application of algorithmic trading and trading venues, ” imes discussion paper series no. 2010 - j - 26, institute for monetary and economic studies, bank of japan ( in japanese ). see hendershott, t., c. m. jones, and a. j. menkveld, 2011, “ does algorithmic trading improve liquidity? ” the journal of finance, forthcoming ( february 2011 ). see hendershott, t. and r. riordan, 2009, “ algorithmic trading and information, ” net institute working paper no. 09 – 08. electronically and automatically, according to surveys and recent studies of equity markets. in currency markets, about half of the amount traded is estimated to 3 involve algorithmic trading. 4 although there is less electronic trading in the japanese equity market than in the united states and europe, it is currently a growing focus of attention. arrowhead, the new ordermatching engine for cash products on the tokyo stock exchange, has been operating smoothly and steadily since its launch at the beginning of this year. the results have been impressive. the order - response time of cash equity trades has been reduced to only a few milliseconds. also, in february 2011, the osaka stock exchange plans to launch j - gate, a new high - speed order - matching engine for equity derivative trading. proprietary trading systems ( ptss ), which correspond to the multilateral trading facilities ( mtfs ) in europe, still have only a small market share in japan, but their trading volume is gradually increasing. in tandem with these infrastructural developments, algorithmic trading volumes seem to be increasing steadily in japanese equity markets. although no official statistics are available, 20 to 30 percent of all orders received by the tokyo stock exchange are placed at colocation sites, 5 which are specially designed for automatic, high - speed trading. 6 this gives an indirect but clear indication of the growing importance of electronic and automated trades in japan. 3. positive effects of expanding electronic trading with its greater speed and diversified trading venues, electronic trading has changed the market microstructure of the financial world. market