… on stock exchanges. The rise of high-frequency trading has drawn widespread attention in the United States.
But for a variety of reasons the shift in Japan has gone largely unnoticed outside the financial community.
The rise of high-frequency trading has drawn widespread attention in the United States. Critics like Michael Lewis, whose best-selling book, “Flash Boys,” painted the HFT crowd as villains, argue the practice gives people with the fastest computers an unfair advantage.
But for a variety of reasons, most of them reflecting the dominance of the Tokyo Stock Exchange, the shift in Japan has gone largely unnoticed outside the financial community. In a Bloomberg poll taken in July, 28 percent of respondents from Asia expressed a negative view of high-frequency trading, compared with 57 percent in the U.S.
The daily frenzy takes place quietly, in two data centers overlooking Tokyo Bay. Originally developed by Tokyo Electric Power Co., the buildings sit atop one of the largest electricity substations in Japan and are designed to withstand earthquakes, tsunamis and typhoons.
Inside, thousands of computer servers belonging to high-frequency traders, brokers and the Tokyo exchange are stowed in refrigerator-size cages. Linked by miles of fiber-optic cable running along walls and ceilings, the machines are involved in nearly every stock, future and option trade, TSE data show. Since 2010, the value of shares bought and sold each year through HFT computers housed alongside the exchange’s own systems has more than tripled to almost 270 trillion yen ($2.3 trillion), according to TSE data on turnover and co-location activity.
The machines are armed and overseen by the same high-frequency specialists that dominate U.S. exchanges, including Virtu Financial Inc., Tower Research Capital LLC and Hudson River Trading LLC. In all, several dozen firms employ software to match orders on the TSE’s five-year-old Arrowhead trading platform at speeds more than 1,000 times faster than was possible five years ago. 90 percent of the stock trading happens in one place: the Tokyo Stock Exchange. The U.S. stock market, by contrast, has become highly fragmented, enabling computers to trawl for profit among 50 separate venues.
Using everything from statistical arbitrage to artificial intelligence, and operating with the blessing of exchanges and regulators, the computers make money capturing spreads and other price discrepancies.
But making money with high-frequency in Japan is harder than it is in the United States. That’s because more than 90 percent of the stock trading happens in one place: the Tokyo Stock Exchange. The U.S. stock market, by contrast, has become highly fragmented, enabling computers to trawl for profit among 50 separate venues.
“‘Flash Boys’ definitely created a lot of noise in the U.S., but within Asia it would be less effective to execute those strategies because we mostly have single venues,” said Dickson Mok, the head of central dealing at asset-manager Pinebridge Investments Asia Ltd. in Hong Kong. “It’s not as fragmented here as America, and that puts a damper on that kind of HFT trading.”