At present, almost 70 per cent of institutional equity trading in Japan is still conducted through traditional single-stock transactions via brokers sales traders – a proportion that has not changed over the past 12 months.
Greenwich consultant, John Feng, said: “A fair proportion of Japanese institutions have yet to establish centralised desks, where professional traders are specifically charged with trading for a whole institutional complex.”
But noting that the biggest institutional traders in Japan used algorithmic trading strategies to execute 6 per cent of their total equity trading volume in 2006, up from just 1 per cent in 2005, Mr Feng added over the next 12 months these institutions expected to be executing 12 per cent of their equity trading business through algorithmic strategies.
Overall, Japanese institutions expect electronic trading to increase from 8 per cent of total trading volume to 13 per cent in 2007.
By contrast, US-based institutions already execute nearly one quarter of their trading volume via single-stock electronic execution and expect e-trading volumes to increase to a third over the next two years.
But Japan ranks second behind the US in global algorithmic trading, with 5 per cent of total trading carried out by Japanese institutions – ahead of the UK (4 per cent), continental Europe and Asia ex Japan. While Asia ex Japan is “a step behind” Japan in terms of self-directed electronic trades, the region is expected to witness a “tripling in volumes to around 17 per cent by 2009” according to Mr Feng.
Greenwich found that larger Japanese institutions are devoting additional resources and attention to the trading function as they focus more on best execution and trading costs.
“From an institutional perspective [in Japan] there is rising pressure to reduce overall commissions and utilise an increasing number of electronic trading and algorithmic trading channels to achieve best execution,” explained Mr Feng.
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