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TSE’S Arrowhead reduces costs of trading Japanese equities

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The implementation of the Tokyo Stock Exchange’s Arrowhead trading system has resulted in a reduction in the costs of trading Japanese equities, according to analysis by ITG.

According to the research, January 2010 saw a 36 per cent drop in Japanese trading costs compared to the previous month. This is the largest month on month per cent drop in Japanese trading costs in over a year and a half.

This differed from trading cost trends in other Asian markets over the same period – for example Hong Kong saw a smaller 17 per cent drop and Korea saw an increase in average costs between December 2009 and January 2010.

This equates to an average cost saving of USD18,000 for every USD10m of Japanese equities traded in January 2010 compared to December 2009.

The reduction in costs was most significant for large cap Japan stocks with a 46 per cent decrease, followed by mid caps at 27 per cent and small caps at 14 per cent.

Costs had been trending downwards in the aftermath of the global financial crisis, but this monthly drop is sharper and breaks from the trend line. ITG says this may be largely attributable to changes in market structure initiated by the Arrowhead project, in particular average spreads on the TSE narrowing over 15 per cent from 24.4 in December 2009 to 20.7 in January 2010, and a 16.5 per cent uptick in average daily turnover between December and January.

This was accompanied by a 30 per cent fall in typical trade size (both volume and value) amongst the most liquid stocks (Nikkei 225). This trend is reflective of developments seen historically in other global markets, for example the US: as electronic trading develops, spreads narrow and automation on trading venues becomes faster. This results in a reduction in average trade size, though total volumes traded remain high or increase, says ITG.

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