Japan Opens Up to Foreign Technologies

By Maria Trombly | Securities Industry News | April 24, 2006

Automated trading and related needs spur IT imports

As the forces of automated and algorithmic trading spread to Japan, the country's brokerage industry is throwing off its historical insularity and investing in technologies invented elsewhere, principally the U.S., where advanced trading and related compliance and support systems developed first.

Last year about 10 percent of the Japanese brokerage industry's information technology spending went to software, hardware and services from non-Japanese companies. That will increase to 15 percent in 2006 and 20 percent in 2007, estimates Celent. The Boston-based research firm sees the Japanese brokerages' aggregate IT budget rising at a 10.5 percent compound annual growth rate, from $2.84 billion for the 12 months ended March 2006 to $3.47 billion for the year ended March 2008.

"More and more securities firms, both buy-side and sell-side, will use foreign technology," says Tadao Tamaru, an IT consulting services manager at the Tokyo Stock Exchange (TSE). "There is no reason Japanese firms should be limited to Japanese technology."

Japanese firms already use foreign-produced hardware and software, operating systems and databases, says Tamaru. Foreign vendors dominate the network technology market, a business where Japanese vendors haven't yet proven themselves. He adds: "Many investors are shifting from traditional trading to online channels, and transaction volumes are rising significantly. That's why many securities firms rely on high-performance network technology."

Demand for electronic trading, in turn, has forced Japanese brokerages to look abroad for more-complex trading platforms, says Neil Katkov, Celent's manager of Asia research.

"More than 70 percent of retail investments are done online now, over 1 trillion yen," says Kats Watanabe, managing director for Japan and Asia at Vienna, Va.-based FolioFN, an online investment and trading systems developer that two years ago created for Nikko Cordial Securities a separately managed account program, the first offered in Japan, according to FolioFN.

"Interest in algorithmic trading is starting to pick up in Japan, and this will no doubt drive adoption of foreign vendors due to their expertise in this area," says Katkov. "The technology is so advanced that it's difficult for domestic vendors to catch up."

Nomura Securities Co., for one, turned to Los Gatos, Calif.-based Vhayu Technologies for a streaming- and tick-data system for a TSE feed handler to support its algorithmic trading. Vhayu announced the Tokyo implementation of its Vhayu Velocity system in late February, noting that Nomura had been a Vhayu user in London and New York. The adoption of the same technology in Japan reflected the overall IT-import trend and gave Vhayu a foothold in the country (Securities Industry News, March 6).

But Japan isn't ready for large-scale adoption of algorithmic trading--the concept hasn't yet gotten the necessary push from institutional investment managers. "Most buy-side firms still rely heavily on a manual process," says Katkov. The TSE infrastructure, not yet advanced enough to support algorithmic trading effectively, "is hindering large-scale use," he adds.

IT spending is highly concentrated among the big three securities companies--Nomura, Daiwa Securities and Nikko Cordial--according to Katkov. Together they accounted for 47.6 percent of total industry IT spending in the year ending March 2006, he says. Each of the three set up technology subsidiaries in 1965, 1989 and 1999, respectively.

Katkov believes that 20 to 30 non-Japanese technology vendors are trying to break into the domestic securities market.

The few that have established a Japanese presence and worked to "localize" their technology have an advantage. "It's not just a case of them buying into Western technology," says Cameron Field, managing director for Asia-Pacific of Charles River Development, a Burlington, Mass.-based order management systems company. "After working in the Japanese market for some time, we have earned their trust."

Charles River has been on the ground in Japan for three years, and its software can handle Japanese characters. The company has worked with Japanese clients to incorporate Japanese equity workflows into its systems.

As a result of the groundwork, earlier this year Charles River signed Daiwa SB Investments, a joint venture between Daiwa Securities, Sumitomo Mitsui Financial and T. Rowe Price, which consolidated its fund management operations on the Charles River Investment Management System. Also this year, Charles River signed Nissay Asset Management.

Daiwa spokesperson Yoshihisa Kaneko confirms that the company is using technology from foreign companies, including several different trading system vendors, but he declines to name names. A critical factor in choosing a foreign vendor is whether it has a support team in Japan, he adds.

Another foreign technology company making a long-term commitment in Japan is Bangalore, India's iGate Global Solutions, an IT consulting and outsourcing firm. It entered Japan ten years ago; 65 percent of its local employees, which number just over 100, are Japanese, and its platform has been tailored for the market.

M.V. Naveen, iGate's regional head for Asia-Pacific, says the company has several large brokerage clients in Japan--he is not free to disclose their names--and expects to double its workforce in the next 12 months.

"We enjoy substantial brand equity in the Japanese market, which we will leverage," Naveen says. "We have strong domain knowledge and also the advantage that comes from being present for a long time in this market, which has language and cultural barriers."

The foreign vendors may be growing smartly, but they're starting from a very modest base. Competition from in-house development teams and domestic vendors will keep growth to a "slow trend," Katkov predicts. "It's not an explosion."

"We aren't seeing any accelerated moves by domestic Japanese brokerage firms to embrace foreign technology," agrees Naveen. "However, there are pockets where some local brokerage companies are leveraging foreign technology."

These pockets include analytics, says Naveen, and compliance is also becoming an area of increasing interest for foreign suppliers. There is currently a push for stronger corporate governance and executive accountability in Japan. A Japanese version of the Sarbanes-Oxley Act is being drafted and is expected to take effect in 2007. As in trading technology, Western companies have native expertise to bring to the table, and if it can be adapted to Japanese needs, they could find a receptive market.