How to Trade in Japan: A User's Guide to Japan's Capital Markets

by Neil Katkov, PhD, May 30, 2012
Asia-Pacific

Abstract

With high frequency trading (HFT) strategies nearing 20% of equities volumes, it is only a matter of time for Japan to reach the advanced execution levels that characterize a fully modern market.

Celent’s report, How To Trade In Japan: A User's Guide to Japan's Capital Markets, sponsored by NYSE Technologies, provides an overview of the state of Japan’s cash and derivatives markets, the development of advanced trading infrastructure in Japan, and the regulatory framework governing market participation by both onshore and offshore firms.

Most of the building blocks of the mature market structure that characterizes the US and Europe are already in place in Japan. Recent years have seen Japan’s exchanges introducing low latency matching engines, such as the Tokyo Stock Exchange’s arrowhead system, and the establishment of fast off-exchange venues including SBI Japannext and Chi-X Japan. Japan’s remote trading participant system, established by the Financial Instruments and Exchange Law (FIEL) of 2008, makes it possible for offshore firms to trade directly on the Japanese markets, although few firms have yet to take advantage of this access.

“Despite a tendency to conservative regulation, in many ways Japan is Asia's most advanced capital market,” says Neil Katkov, PhD, Senior Vice President, Asia for Celent and coauthor of the report. “Japan’s capital markets are evolving to an advanced market structure, characterized by low latency infrastructure, fragmentation of liquidity, and advanced execution technologies that provide the foundation for new trading strategies and opportunities.”

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

 

About NYSE Technologies

3

Overview of Japan’s Economy and Markets

5

Evolution of Capital Market Structure

7

 

Exchange Technology

7

 

PTSs on the Rise

8

 

Exchanges and ATSs

10

 

Trading Trends by Asset Class

14

Market Participants

18

Business Model Choices for Firms Trading in Japan

20

Requirements for Trading Participants

23

Trading Access

26

Clearing

27

Regulatory Structure

30

 

Financial Instruments and Exchange Law (FIEL)

32

 

Major Regulatory Bodies

32

Regulation and Compliance

35

 

Trading Participants

36

 

Proprietary Trading Firms

36

 

Hedge Funds

36

Trading Rules

38

 

Insider Trading

38

 

Market Manipulation

39

 

Other Behaviors Affecting Investor Confidence

39

Taxation

41

Special Issues

42

 

Major SQ

42

 

Best Execution

42

 

Circuit Breakers and Price Limits

43

 

Pretrade Risk

43

 

Short Selling Restrictions

43

 

Lunch Break

43

 

Closing Auction

44

Information Sources

45

Leveraging Celent’s Expertise

46

 

Support for Financial Institutions

46

 

Support for Vendors

46

Related Celent Research

47

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