Japan (lightly) regulates high-frequency algorithmic trading

It's more than half of the Tokyo Stock Exchange, but just who's doing what is hard to say

Japan has decided it's high time it got a grip on just who is conducting high-frequency algorithmic trading on the Tokyo Stock Exchange.

The nation last week passed amendments to its Financial Instruments and Exchange Act requiring high-frequency traders to register with regulators and provide evidence of robust risk management practices. Offshore traders will also have to register and establish an office in Japan.

More than 70 per cent of orders on Tokyo's stock exchange are now made by automated traders. Those trades account for just under half of the value of trades.

Because high-frequency trading makes a lot of orders in a very short amount of time, and other high-frequency traders respond to those movements, the practice has the potential to make markets volatile through bad orders or algorithms making odd purchases that spook markets.

Others have sought to manipulate algorithmic trading for personal profit, but in so doing spooked the rest of the market.

Japan's move is therefore an attempt to ensure its regulators can at least put a name to a trade, in the event something goes awry.

The new laws come into effect in early 2018. ®


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