Turning on to the techno wave

Japan’s major banks have been reluctant to adopt electronic trading technologies, but the tide is turning as banks begin to recognise the potential of the internet. Nick Sawyer reports
A dizzying array of internet-based trading platforms for over-the-counter derivatives and foreign exchange have emerged in the past 12 months, but until recently most of the attention has focused on US and European financial institutions. Now that seems set to change. Over the past few months, a number of software companies have rolled into Japan in a sign that attitudes are shifting, and even the major banking behemoths now appear to be mulling over internet strategies.

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Up until now, Japanese traders have relied, for the most part, on traditional domestic broking systems and their own internal data centres. Electronic trading for foreign exchange is nothing new in the Japanese market, but there has been a reluctance to embrace the internet for business purposes, and consequently Japanese banks have been slow to develop proprietary online trading platforms.
Meanwhile, a flood of third-party software vendors have developed online solutions, but have focused predominantly on marketing to US and European financial institutions.
Now, however, they view Japan – a country with a reputation for being technologically adaptive – as a potentially big market for their products.
“Here in Japan, we are still a bit behind the trends in Europe and North America, in the sense that everyone is talking about it [electronic trading] but the uptake has been slow,” says Jerome Kemp, Asia-Pacific head of futures and options and a managing director of JP Morgan, based in Tokyo. “That said, I think we are about to turn the corner in terms of clients seeking and demanding electronic access.”
The change in attitude among Japanese institutions is partly in response to the steady evolution of online platforms, and particularly the development of application service provider (ASP) technology. ASPs cut costs by hosting the trading software on a central internet platform, rather than on the banks’ individual servers. Indeed, the cost-efficiency appears to be a major driver, helping Japanese clients to overcome their initial scepticism of the internet.
As well as ASPs, there are a range of alternative online platforms available in the Japanese market, including: proprietary systems that are available only to dealers within a particular bank; dedicated private lines linking a financial institution to a central database run by a third party; and internet systems where the trading software resides on a client server within the bank.
JP Morgan’s futures and options brokerage is currently marketing a proprietary online system called ExtraTrade, which gives its clients access to global futures and options exchanges. The Tokyo Stock Exchange was added to the system last year, and it will soon be extended to include the Tokyo International Financial Futures Exchange. However, the system, which was developed using software from French company GL, is global and not specific to Japan.
Over the past year, JP Morgan has participated in the development of a number of online platforms, ranging from futures and bonds to credit derivatives. But Kemp adds that determining what products to make available via the Web is by no means an easy decision. “At JP Morgan, there are a number of discussions that are going on now with regards to what we can actually deliver via the internet to our clients,” he says. “Clients on the one hand don’t want to lose access to a multiplicity of price providers, but they want to gain, by the same token, the efficiencies in terms of the ergonomics and cost that the internet provides. So there’s a very interesting debate going on between clients and providers as to what the best solution is, and I think that the jury is still out.”
Merrill Lynch is also looking to add to its current electronic trading capabilitites, according to Paul Grotowski, Tokyo-based director of Pacific Rim debt markets and e-commerce. “An application called EOS [execution order system] delivered via dedicated lines has been marketed in Japan for more than five years and
covers futures, options and convertible bond executions on various exchanges,” he says. “EOS serves as the primary front end for in-house traders, as well as providing order management and back-office functions. This application was developed in-house and we are currently looking at EOS delivery via the internet,” he adds. In terms of foreign exchange, the bank uses a number of third-party vendors including EBS, Reuters Dealer 2000 and Fast Forwards, the Tullett & Tokyo/Bloomberg platform.
Bank of Tokyo-Mitsubishi (BTM) is currently working with electronic trading portal FXall for its online foreign exchange operations. Founded by six financial institutions, including JP Morgan, Morgan Stanley Dean Witter, Goldman Sachs and UBS Warburg, FXall now has a base of 31 banks, and offers straight-through processing (STP) for foreign exchange spot, forwards and options. FXall plans to create an open environment to automate foreign exchange transactions and allow dealers to have a single point of access to all participating dealers. Banks can access the platform over the internet or via a private network, although liquidity providers may be required to install software provided by FXall.