Tech Talk

by Will Acworth
Article provided courtesy of Futures Industry Magazine, January/February 2009 Issue

Japan’s TFX Revamps Products and Technology

The Tokyo Financial Exchange is moving forward on some innovative plans to expand its business, with new products, improved technology, and a remote membership plan for foreign firms.

Two foreign firms-London-based G.H. Financials and Chicago-based Advantage Futures-have applied to Japan’s Financial Services Authority for permission to become remote members, which will allow them to access the exchange directly without having to establish an office in Japan. TFX says it is hoping that the two firms can start trading by the end of the first quarter, and is promoting the remote membership program to other trading firms in London and Chicago.

“Advantage Futures is excited about our new relationship with TFX,” said Joe Guinan, the firm’s chief executive. “I believe our remote membership will benefit our current clients with additional market access and provide an excellent opportunity for Advantage to increase its global presence.” Guinan noted that TFX is currently the only futures exchange in Japan that offers remote membership, and added that his firm has been in discussions with other exchanges elsewhere in Asia.

TFX is planning to seek regulatory approval from the Monetary Authority of Singapore so that it can offer remote membership in that city as well. A large number of Asia-focused hedge funds are based in Singapore, and the Singapore Exchange’s top futures contract is based on the Nikkei 225. In addition, there are a number of proprietary trading firms operating in Singapore that might be interested in remote trading on TFX.
Equally important, TFX received a “Part 30” exemption from the Commodity Futures Trading Commission in October. This means that TFX members can do business directly with U.S. customers without having to register with the CFTC.

Connectivity is another area where TFX is facilitating international access. TFX’s trading platform is based on the Liffe Connect system maintained by NYSE Euronext, which most international brokers and independent software vendors are familiar with. Two vendors, GL Trade and Patsystems, already write to TFX. Another, Trading Technologies, is about to go live, and two more, RTS and Ffastfill, have started the process. So in the near future most traders should find it relatively easy to use a familiar front-end to trade TFX products.

High-Speed Access

The exchange is also gearing up to offer faster access to the exchange, a development that may attract more interest in the remote membership program from firms that specialize in high-frequency trading. Currently trading firms can use proximity hosting services in Tokyo datacenters operated by KVH and Equinix. This allows firms located outside Japan to put their hardware in either of these datacenters and connect to the TFX through the same network as other members of the exchange.

The next step is to implement a high-capacity, dedicated line between the two datacenters and the TFX matching engine, which will reduce latency even further and give firms in these datacenters a speed advantage over existing members. No date has been set yet-the exchange is still in negotiations with KVH and Equinix-but the exchange is hoping to complete the process this year.

All these changes build on the exchange’s upgrade to the Connect system last spring. The exchange moved to version 9.1, the most advanced available, and exchange officials say that round trip time is now down to 10 milliseconds.

New Products

The exchange, Japan’s main market for short-term interest rate futures, successfully branched out into the retail foreign exchange business several years ago with its “Click 365” market. Now the exchange is looking to extend that expertise into the Japanese equity index futures market, long dominated by the Osaka Securities Exchange and the Tokyo Stock Exchange.
In December the exchange announced plans to introduce a futures contract based on the Nikkei 225 stock index. Rather than copying OSE’s existing Nikkei 225 contract, TFX is using the contracts-for-difference structure that is widely traded in Europe and Asia. The TFX Nikkei contracts will be cash-settled and will have no expiration or last trading day. Instead the contracts will roll over automatically on a daily basis.
The exchange expects the new contracts-scheduled for introduction by March 2010-to be especially attractive to retail investors, who have flocked to the mini Nikkei 225 futures contracts listed on the OSE. According to TFX, the existing futures contracts tend to diverge from the index price because their prices also reflect carry costs and dividends paid by the underlying stocks, whereas the new contract will trade at the same price as the index.

Will Acworth is the editor of Futures Industry magazine.