Today, we interview Seth Friedman & Dieter Schwaller, the Co-Founders of Shiroyama Consulting in Tokyo. It is a Financial Services Technology, Consulting, and Representative Agent Services firm. Their clients are primarily overseas based DMA algo & high frequency trading within the equities space as well as sell-side firms in Japan and overseas. It is also working on some exciting Fintech applications utilizing Blockchain, customized hardware, and custom configurable integrated circuits for global trading IT systems. This is a follow up interview. We first profiled them on May 12, 2017. See link here. Both co-founders can be contacted directly on LinkedIn.
1) What does the new 2018 HST law mean in Japan, for the High Frequency Trading hedge funds? What choices do they have to make soon as a
result?
(Seth Friedman) The laws
which were promulgated in May 2017 became effective on April 1, 2018. The new
laws mandate that a firm implementing High-Speed-Trading (“HST Operator”) must
be registered with the Japanese Financial Services Agency (“FSA”) prior to
commencement of HST operations.
The law
stipulates that an HST Operator must establish and maintain an onshore presence
in Japan. This is the most immediate and important decision facing an HST
Operator. The onshore requirement can be met by 1. establishing a
representative office; or 2. contracting an Agent in Japan act as the HST
Operator’s representative.
Registration
is obtained by approval of an application to the Financial Services Agency by
way of the Kanto Local Finance Bureau (“KFB”). The FSA and KFB will review the
application for adherence to basic requirements and evidence demonstrating
sufficient personnel and business structure.
It is
important to consider that registration is not obtained by notification but
through an application in which the HST Operator must demonstrate a number of
attributes, including that its business is not found to be contrary to the
public interest, that it has sufficient personnel and business structure to
perform HST operations and that it meets a minimum capitalization requirement
of JPY 10 million.
There is a
six-month exemption for HST Operators who were active prior to April 1, 2018.
Those organizations must submit an application no later than September 30, 2018
or they will be barred from continuing HST operations from October 1, 2018.
Those organizations who submit an application prior to September 30 may
continue HST operations beyond September 30 until a final disposition of their
application if made by the FSA/KFB. There is currently no known avenue of
appeal if an application is rejected. If rejected an organization must
immediately cease HST operations.
2) How many hedge
funds are impacted by the new law, and how many are based overseas and not in
Japan?
(Dieter Schwaller) We have identified no fewer than 83 individual buy-side firms
who would be considered HST Operators. The burden of determining whether a firm
is or is not an HST Operator is largely placed on sell-side firms.
Unfortunately there has been some misunderstanding over exactly
what does and does not qualify.
The law is quite clear, an HST Operator 1.implements automated
order generation; 2. where information communication technology is utilized to
reduce latency in the order submission process by way of a) installation of the trading system in, near, or in proximity
to, the venue data center; and b) a venue interconnect method where a technical
or procedural mechanism to avoid communication conflicts has been implemented.
At least two sell-side firms were informing buy-side firms that
an interconnect method using FIX did not constitute HST and therefore
utilization of FIX would mean it would not be necessary to seek registration.
This position is not correct.
The law is silent as to message/communication protocol and the
FSA has confirmed that protocol type is no influence on determining whether a
firm is conducting HST operations.
3) How many of these
hedge funds have been able to register properly with the FSA or KFB so far? How
many have so far failed to do so?
So far, 6 firms have been registered, all in June. Put another
way, we suspect there are 75+ firms
whose application is currently under review or has yet to be submitted.
There is no information available as to whether, or how many, firms have to
date seen their applications rejected or have decided to change their
investment methodology and forego attempting to register.
No applications have been approved since June 22. We believe
there is a correlation between some of these early approvals and a TSE ETF market
making initiative which went live on July 2. Of the 6 approved HST Operators 3
were listed by the TSE as ETF market makers at the time of the program launch.
4) What deadline is
now realistic to target, if any HFT firm does not want to be barred from
trading Japan in future?
The deadline to submit an application for firms who were active
prior to April 1 remains September 1 while new entrants cannot commence HST
operations until an application is submitted and approved. Given the long
queue, we strongly recommend any organization which seeks to newly commence HST
operations to submit an application as soon as possible.
5) How have you helped
current clients with Shiroyama Consulting so far this year? What do you charge?
We work with organizations in a number of ways, helping to
ensure understanding of requirements, reviewing exiting processes, procedures,
and documentation and recommending modifications to ensure compliance with
requirements in Japan, drafting application documents and representing our
clients in front of the FSA and KFB.
We charge US $20,000 to work with a firm though the ultimate
disposition of their application and then US $20,000 annually to represent a
firm as their Agent in Japan.
6) Do you have any
ability to help other HFT firms this year, that have not found the right
professional assistance to far?
We currently work with more than one dozen firms but we do have
some remaining capacity.
Recently, we have helped numerous HST firms who have expressed
frustration with their current providers and these providers inability to
adequately represent the HST firm in front of the FSA/KFB. We’ve even heard
that some HST firms have called the FSA/KFB directly in an effort to explain a
particular point or topic.
We’re certain these situations are frustrating
for all sides but especially for the FSA/KFB.
7) What do you feel
will take place to HFT firms in the months to come? What scenarios do you
expect?
Due to the
number of HST firms not yet approved there is already a great deal of anxiety
in the environment. This anxiety will only increase as August gives way to
September and the September 30 deadline approaches.
Unfortunately,
the anxiety level is being exacerbated by some sell-side firms, These sell-side
firms are making uninformed comments to their HST clients which are absolutely
contrary to reality. We have heard of sell-side firms describing FSA/KFB
procedures or “receipts” which are in fact non-existent or even communicating
that the September 30 deadline is a deadline for approval of the application
rather than submittal of the application.
We applaud the
TSE for their efforts to undo these comments and the FSA/KFB for patiently shepherding
the various constituents through the process.
