1)
When did you start Shiroyama Consulting? Why did you choose to start
your firm in Tokyo, Japan? What is your main business and current state of
operations?
2) There
has been a lot of talk about “HFT Regulation” in Japan, could you explain what
this is all about?
The financial services environment in Japan
is on the verge of significant change with the impending introduction of a
vastly revised Financial Instruments and Exchange Act (FIEA) which was
submitted to the Diet by the Cabinet Office on March 3, 2017. The revised
regulatory framework will bring a host of technical, organizational,
disclosure, record-keeping, and educational challenges. The revised FIEA focusses
on three main areas, 1. High-Speed-Trading Regulations (what has been described
somewhat ominously as HFT Regulation and includes more than 20 new Articles);
2. Exchange Groups; and 3. Information Disclosure. These proposed regulations
are publically available on Japanese Government websites but currently are officially
only available in Japanese.
The regulatory changes in the area of
high-speed-trading will impact a relatively small segment of the automated-trading
and quantitative investor community generally described by non-practitioners as
High Frequency Trading (HFT); the exact number of impacted firms cannot be determined
(most likely between 18 and 60+ firms) until the Cabinet Office and FSA defines
what it describes as HFT Conduct. As a result, there is enormous uncertainty as
to what technology techniques, investment strategies, and firms will be
impacted. Once a definition is created, a firm that falls within the definition
will be officially categorized as an HFT Operator.
Once judged an HFT Operator, a firm will
have to establish an onshore presence, either by opening an office themselves
or utilizing the services of a representative agent; a firm could also respond
by changing their infrastructure setup and trading behavior to no longer be an
HFT Operator, or cease activity in Japan all-together. The short-term and
long-term impact to trading and overall liquidity could be unpredictable,
sudden, and inconsistent. Certainly there will be unintended and unforeseen consequences.
While small in number (relatively speaking)
HFT Operators represent a very large proportion of activity on venues. With
slightly less than 50% of traded volume and more than 65% of submitted orders
originating from TSE Co-Location an enormous percentage of liquidity is
potentially affected by how HFT Operators respond to the new regulations. The
corresponding uncertainty concerns not only HFT Operators, but others who fear
the potential impact if a significant percentage of liquidity is affected.
3) Where do you see the opportunity for
your firm to grow? What key advantage do you have today in Japan?
We have two main long-term business streams
1. Financial Services Technology; and 2. Consulting and Representative Agent
Services. We see an immediate regulatory-driven opportunity
in the Japanese environment with longer-term opportunities in other
Asia-Pacific, EMEA, and American environments. The short-term opportunities in
Japan are driven by the FIEA, the forthcoming definition of HFT Conduct, and
detailed rules regarding registration requirements. Depending on the final form
of these it is possible that anywhere from 18 to 60+ firms could be directly
impacted. Registration requirements, which include the need to describe
strategy details, could become extraordinarily complicated. Will firms be
required to document the high-level firm strategy, or individual investment
strategies at a sub-firm, pm, or asset class level? We won’t know until Cabinet
Office Orders are issued at some point after the revised FIEA is passed by the
Diet. No matter the outcome, we’ll be able to help firms understand the
regulations, the processes and procedures of registration, and adhering to
record-keeping requirements.
Our experience and expertise is aligned to
deliver significant value to all stakeholders; buy-side, sell-side, venue, and
regulatory. Our team has vast experience from previous sell-side and buy-side
roles from a number of perspectives including extensive interaction with
regulators and venues not only in Asia, but particularly in Japan, design and
implementation of sub-microsecond automated execution strategies, and
conceptualizing and bringing to market paradigm-shifting capabilities such as
US patented network-based packet analysis tools for regulatory compliance and
microwave communication networks to significantly reduce data transmission
latencies. We deeply understand trading systems and environments, the buy-side
quantitative hedge fund space including in-depth experience with the HFT
segment, and the buy-side real-money asset manager environment.
The new regulations are targeted at an
investor community which is largely offshore to Japan. We see a strong need to
help these investors understand, adapt, and conform to the new regulatory
environment in a country that many find challenging to navigate. Further, in an
environment where the FSA seemingly perceives venues and sell-side firms as
biased in a certain direction, we believe our objectively un-biased stance,
which is informed by many years of sell-side and multi-faceted buy-side
experience, will be extremely beneficial to the overall environment including
the formulation of feasible regulations.
We will strive to advise and assist
offshore clients in their direct relationship with the FSA and to assist the
FSA in its effort to understand and maintain up-to-date awareness of the
organization, staffing, technology, trading, legal, and funding structures
which are utilized by HFT Operators.
4) Tell us about your Fintech and Blockchain
initiatives for trading services in future.
Our second phase of business operation will
involve leveraging our in-depth experience conceptualizing, developing,
evangelizing, and implementing ultra-performant infrastructure and trading
systems on a global scale. We are well underway in the design of future-view
systems and have been looking at ways to push the envelope to achieve even
higher performance, efficiency, transparency than exists today. These
initiatives embrace many factors types of technologies, ranging from
optimization of functions in hardware to revised data transmission paths, and
include technologies such as blockchain and customized integrated circuits.
It is undeniable the current environment
will evolve. The sell-side economics of creating and maintaining high-quality
electronic-trading environments have been challenged for a number of years.
These challenges will grow even more significant as MiFID II drives commission
unbundling and traditionally non-quantitative investors implement quantitative
methods with the corresponding demand for broader access to
ultra-performant-trading and ever lower commission levels. Our services and
products are crafted to deliver the performance demanded by sophisticated organizations with an underlying economic
model which will ease the cost pressures experienced by buy-side and sell-side.
5) Have trading opportunities in Japan,
changed in any way due to government actions or new technologies?
Absolutely! The Japanese environment has
seen tectonic change over the past ten years. The introduction of Arrowhead
brought real-time order matching where previously orders were matched in
three-second cycles, exchange co-location, unfettered access to full order-book
market data, broad acceptance of alternative venues, big-data analytics, and
reduced bid/offer spreads. These changes occurred hand-in-hand with the
introduction of new technologies which collectively allowed for, and created,
exponentially increased order volume as well as sell-side, exchange, and
clearinghouse capability to successfully support such volumes.
Looking to the future, as described
earlier, the revised FIEA will implement a new framework specifically targeted
at HFT Operators, this new framework, its implementation and ongoing operation,
known knowns, known unknowns, and the law of unintended consequences will no
doubt create broad street-wide challenges. Hopefully these choppy waters will
be smoothly navigated without negative impact to the environment.
Separate from the regulatory framework, we
see an increasing number of traditionally non-quantitative investors
implementing quantitative methods and introducing new types of data sets into
their investment process. The trading process and methods of these
organizations will evolve as well and we expect the demand for ultra-performant
trading capabilities (sub-microsecond venue interaction) to expand. We believe
that with these changes, combined with the effects of MiFID II, a new round of
commission compression in agency business is on the horizon. These changes will
bring even more pressure upon sell-side organizations to rationalize the
portions of their platforms which serve as payment channels for their core
business of content and capital. In response, we see broader sell-side acceptance
of outsourcing non-differentiating functions to firms or consortiums; as we
have seen with Project Symphony1 and Project Scalpel2.
6) Are there gaps in overseas trading
abilities via the TSE that overseas investors do not fully understand that Shiroyama
Consulting try and fill?
The biggest challenge we currently see for
overseas investors isn’t a trading issue per se, but rather the seemingly
incomplete awareness of the proposed revisions to the FIEA by large segments of
the sell-side and buy-side community and the consequent lack of engagement with
the FSA or Cabinet Office over potentially problematic regulations. The
buy-side, particularly the offshore buy-side, relies upon the FSA, TSE, and
sell-side organizations for information. Unfortunately the buy-side seems to
have only a high level understanding of the proposed changes to the FIEA. The
details are publically available but essentially inaccessible as the revised
FIEA itself is as yet untranslated.
The FSA, TSE, and sell-side have broadly
communicated to the buy-side that some form of registration and “proper risk
management” will be required. The devil is of course in the details, and there
is seemingly little awareness of the details. For example, at the moment
“proper risk management” is not defined in detail and there is inconsistent
understanding among a number of entities as to its exact meaning. Is Naked
Access allowed or not allowed? Different entities have different perspectives.
We’ve gone through the Japanese text of the
proposed regulations and have identified no less than 21 specific issues which
are either open to broad interpretation or are cause for specific concern.
We’re worried as to the direct impact but more so we fear the law of unintended
consequences will reign supreme. We’re already engaging venues, regulators,
sell-side, and offshore investors to provide more details, highlight issues,
and encourage participation in the process.
7) Where do you see your firm growing the
most in the next 2-3 years? Will this continue within the Blockchain or Fintech space? Are you seeking investors for
new projects or service offerings?
We see significant growth in Consulting and
Representative Agent Services resulting from the revised FIEA and its
requirements, particularly that HFT Operators must maintain an onshore Japan
presence. This requirement can be satisfied two ways, either by establishing an
office or by contracting with a representative agent. We don’t anticipate
offshore HFT Operators actually opening their own offices in Japan, with the
attendant cost and complexity of running a people-center in Japan; we
anticipate most will utilize the services of a representative agent.
We see a significant global opportunity for
our Financial Services Technology efforts. We believe a fundamental reckoning
in the client-directed-trading space is on the not-too-distant-horizon where a
number of factors – non-differentiated products, many years of commission
compression, evolving buy-side demand, MiFID and unbundling, a new round of
commission compression, and Brexit, – will force the sell-side to undertake a radical
rethink of the traditional model in much the same way as firms have embraced Project
Symphony and Project Scalpel. In Japan, the challenge will be exacerbated by
the already painful and inevitably increasing experience of a shortage of
appropriately skilled staff brought about by a declining and rapidly aging
population.
As far as investment, yes, we are actively
engaged with a number of potential partners and welcome others to join the
discussion. Just as the environment has changed dramatically over the past ten
years, not just in Japan but around the world, so too will the global
environment change over the next ten years. We hope to create a group of
like-minded visionary organizations to lead the next wave in the evolution of
performance, efficiency, and risk management.
Those desiring to learn more about our
products and services and the proposed revisions to the FIEA can request
information by visiting www.shiroyamaconsulting.com and completing the request
form. We can also be contacted directly on LinkedIn.
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For more Buy-Side or Sell-Side roles in Asia-Pacific, contact our TMJ Partners Japan & Asia Finance team in Tokyo.
Mark Pink Shinichi Nagasawa
Tel + 81 3 3505 3891 Tel +81 3 3505 3891
Email pinkmark@tmjpartners.com Email nagasawa@tmjpartners.com
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