High speed trading rule passed in Japan

A new law has come into force in Japan which will affect high frequency trading.

The law means that high frequency trading firms will have to register with regulators.

The law passed on May 17th 2017, will come into force in early 2018. The law was passed after recommendations by Japan’s market regulator, the Financial Services Agency (FSA).

High frequency traders in Japan will also be required to provide evidence of proper risk management systems.They will also be required to either have an office in Japan, or be represented by an agent.

The Japanese regulator plans to operate an ID system, in which each trader is give an ID and from this, trades will be tracked.

High frequency trading accounts for 70 per cent of all orders on the Tokyo Stock Exchange but, after taking into account order cancellations, only accounts for slightly less than half of actual traded value.

High frequency trading has been controversial in Japan, with the regulator claiming that it may undermine stability – but others argue that in fact, it creates liquidity in the markets.

Seth Friedman, chief executive of advisory firm, Shiroyama Consulting Co. was quoted in the media as saying: "The definition has not yet been created. We can guess at who might be affected, but we don't know for sure the full scope of who will be affected."

The regulator in Japan is not alone. In the EU, registration of high frequency trading will be mandatory as of next year.

According to a paper published back in 2014,by Go Hosaka, entitled Analysis of high-frequency trading at Tokyo Stock Exchange,high frequency trading increased in Japan after the Tokyo Stock Exchange replaced its equity trading system in 2010 and since then “executions have become increasingly frequent, and have occurred in smaller lots.”

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