Chi-X continues Asia march with Tokyo launch

Alternative lit trading venue Chi-X has had a busy month. Having been granted its Japanese proprietary trading system (PTS) licence in early July, the firm went live with Chi-X Japan last Thursday (29 July), as scheduled, and expects to launch in Singapore in September and Australia around March. 

The dates for Singapore and Australia are later than was originally planned, but the US stock market 'flash crash' on May 6 -- which prompted regulators worldwide to examine their rules on algorithmic, or computer-based, trading -- inevitably delayed matters.

Chi-X Japan kicked off a carefully controlled launch period with a small group of participants and a limited number of large liquidity stocks. This week, trading is expected to expand to include the entire group of Nikkei 225 names, plus other selected stocks. It will operate from 8:00am to 4:00 pm JST using a continuous matching model.

Chi-X Japan -- a subsidiary of Instinet, which in turn is a wholly owned subsidiary of Nomura Holdings -- operates its market exclusively for the use of registered broker/dealer participants. All trades are cleared through the Japan Securities Clearing Corporation (JSCC), rather than having to be printed to and cleared through the local stock exchange, as is the case in, say, Hong Kong.

"We didn't want to start without [the JSCC]; we thought it was very important to enter the market with the main clearing system ready for us," says Ronald Gould, Asia-Pacific head of Chi-X in Hong Kong. One of the reasons why PTSs have failed to gain much traction in Japan -- they hold only about 1% of cash equity market share -- is that they did not get set up with a separate clearing system, he tells AsianInvestor.

Japanese PTSs have also been hampered by their close links with associated brokers, and of course brokers don't like to trade on each other's venues, he adds. Those that offered PTSs and tried to position them as neutral venues were not successful as a result, says Gould. "We don't operate as a broker-dealer anywhere," he adds, "so we're in a different position than many of the other offerings."

Also, ITG, Liquidnet and other agency brokers that offer block crossing via dark pools are as likely as anyone else to use Chi-X, he says, and they regard it as just another tool or venue.

Gould says there's been no limit on or suggestion from the Japanese authorities as to how much market share Chi-X should aim for or expect, and is very happy about the way they have gone about things.

"Japan has had some inaccurate press with regard to its legal and foreign regulatory environment," he says. "But it's the first Asian market we're opening in, because it's the first jurisdiction that has encouraged change and innovation and welcomed a firm like Chi-X as a result. So full marks to Japan for having openness and knowledge of these drivers of market reform -- you can't say that for all of the markets in Asia."

Moreover, progress for Chi-X in Japan was less affected than, say, in Australia or Singapore, by analysis into the US market 'flash crash' of May 6 and its causes. That's because Japan's Financial Services Agency concluded it already had a regulatory environment that included many of the remedies now being considered in the US, so didn't need a dramatic overhaul of its rule book, says Gould.

As for the level of market share and foreign participation Chi-X expects to achieve in Japan and indeed other Asian markets, Gould says he thinks it will reflect how things have developed in markets such as Canada and Europe.

"There's no reason why our experience would be any different in the Japanese market," he says. "When we've opened up, we've tended to draw in new liquidity to markets, and we expect the same will happen in Japan, Singapore and Australia."

For example, since its launch in March 2007, Chi-X Europe has achieved turnover of €482 billion, and obtained more than a quarter market share (26%) of the FTSE 100 market, according to the firm's second-quarter results.

However, some have expressed concern about the potential advantage that algorithmic -- or high-frequency -- traders can derive from electronically traded markets over other users, particularly retail clients.

Gould feels such worries are misguided. "This is down to a fundamental misunderstanding of what's going on; there has always been a wide range of quantitatively driven trading approaches and styles," he says. "People can build sophisticated models or processes to help analyse and act on information faster; this has been happening for decades in some form or other."

A lot of the concerns are about retail investors, he adds, but all investors should be able to benefit from high liquidity and lower transaction costs when they use a broker with that level of technology.

So what about the Tokyo Stock Exchange's plan, announced last week, to look at extending its trading hours to boost its international competitiveness? Chi-X already offers international trading hours, and Gould does not seem unduly concerned. "Everyone would expect the TSE to respond to the competitive environment and it would be naïve to think it would do otherwise -- we would do the same," he says.

"We see TSE as a compliment [to Chi-X] in many ways," he adds. "We believe the emergence of a second trading venue will increase the overall slice of the pie for everyone, as has happened elsewhere with absolute consistency. We think that's what the TSE feels as well."

Equally, TSE's launch of Arrowhead early this year is also less of a threat to Chi-X than a boon to the overall market, says Gould. Having two efficient and high-speed platforms in Japan will only boost overall liquidity further, he adds.

As for other such venues being set up, he says there's nothing in the three Asian markets Chi-X is building in now to stop competition setting up, "apart from the time, expense and determination that's required. And that shouldn't be underestimated".