Findings from research and studies conducted at the Financial Research Center (FSA Institute) are organized and published as Discussion Papers to stimulate further discussion and comment.
The views expressed in the papers are those of the authors and do not necessarily reflect the views of the Financial Services Agency or the FSA Institute.
Discussion Papers (FY 2016)
|HFT Regulation and Equity Market Structures in Foreign Countries
Tsuyoshi Otsuka, CFA
Abstract | Full text (PDF:3,864KB) (Full text is available only in Japanese.)
|Developments in Regulation of High-frequency Trading and Algorithmic Trading in Germany
Abstract | Full text (PDF:1,428KB) (Full text is available only in Japanese.)
|Optimal Room Charge and Expected Sales under Discrete Choice Models with Limited Capacity
Taiga Saito, Akihiko Takahashi, and Hiroshi Tsuda
Abstract | Full text (PDF:803KB)
|Report on the Current Situation and the Future Challenges for Financial Consumer Protection in Japan with an Eye on Global Trends
Abstract | Full text (PDF:1,992KB) (Full text is available only in Japanese.)
Tsuyoshi Otsuka, Special Research Fellow, Financial Research Center
In recent years, algorithmic trading and HFT (high frequency trading) have expanded rapidly around the world, gaining much attention for their impact on securities markets. Regulatory bodies and market users alike are constantly debating the need for risk controls and regulatory frameworks for this high-speed, high-traffic trading environment. In Japan, HFT growth came with the launch of Tokyo Stock Exchange’s “arrowhead” equity market matching engine in January 2010, which marked the start of a new high-speed era for the Japanese securities market.
The growth of HFT and the changes in the market structure in any country must necessarily be considered together in discussions about HFT. Therefore, recognizing the features of the structure of Japan's and other high-speed equity markets, understanding their differences, and comparing them facilitates constructive discussion on the topic. In addition, a study of the regulatory stance and decisions taken with regard to HFT and market structure is beneficial for deeper discussion.
In this regard, this paper first outlines the general features of HFT, its differences from algorithmic trading, and common trading strategies that they employ. It then attempts to study the relationship between HFT activities and the structural issues in modern securities markets, such as market fragmentation, best execution obligations, maker/taker pricing models. The paper goes on to explain the features of the market structure and regulatory frameworks in the U.S., Europe, Australia, Hong Kong, and Singapore before highlighting a series of significant regulatory decisions related to HFT and market structure.
Keywords: HFT (High Frequency Trading), Algorithmic Trading, Market Structure, ECN (Electronic Communication Network), SDP (Single Dealer Platform), Retail Wholesaler, Fragmentation, Best Execution, Tick Size, Maker/Taker Pricing Model, SIP Feed, Direct Feed, Queue Jumping
''Developments in Regulation of High-frequency Trading and Algorithmic Trading in Germany''
Koji Funatsu, Special Research Fellow, Financial Research Center
This report examines developments in the regulation of high-frequency trading and algorithmic trading in Germany, focusing on the background and the process of enacting the High-frequency Trading Act which came into effect in 2013. It also considers how the regulation through Germany’s domestic laws would be in the future based on the EU’s MiFID II. In considering Germany’s case as a model for the enactment of similar regulations in Japan, differences in the two markets must be noted. Germany is a part of the EU, an enormous market, while Japan has a different market environment. Other factors, such as the political situation surrounding the process of enacting the High-frequency Trading Act, must also considered.
Keywords: Germany, high-frequency trading, algorithmic trading, and MiFID II.
''Optimal Room Charge and Expected Sales under Discrete Choice Models with Limited Capacity''
Taiga Saito, Research Fellow, Financial Research Center (FSA Institute)
Akihiko Takahashi, Graduate School of Economics, The University of Tokyo
Hiroshi Tsuda, Department of Mathematical Sciences, Doshisha University, Visiting Professor at the Institute of Statistical Mathematics
In this paper, we introduce a model that incorporates features of the fully transparent hotel booking systems and enables estimates of hotel choice probabilities in a group based on the room charges. Firstly, we extract necessary information for the estimation from big data of online booking for major four hotels near Kyoto station. Then, we consider a nested logit model as well as a multinomial logit model for the choice behavior of the customers, where the number of rooms available for booking for each hotel are possibly limited. In addition, we apply the model to an optimal room charge problem for a hotel that aims to maximize its expected sales of a certain room type in the transparent online booking systems. We show numerical examples of the maximization problem using the data of the four hotels of November 2012 which is a high season in Kyoto city. This model is useful in that hotel managers as well as hotel investors, such as hotel REITs and hotel funds, are able to predict the potential sales increase of hotels from online booking data and make use of the result as a tool for investment decisions.
Keywords: Hotels in Kyoto, Revenue management, Online booking, Discrete choice model
''Report on the Current Situation and the Future Challenges for Financial Consumer Protection in Japan with an Eye on Global Trends''
Ryoji Kitami, Special Research Fellow, Financial Research Center
The international framework for discussing issues on financial consumer protection has been developed as shown by the issuance of “G20 High-Level Principles on Financial Consumer Protection” at the G20 Cannes Summit in 2011, and “Report on Effective Approaches to Support the Implementation of the G20 High-Level Principles on Financial Consumer Protection” at the G20 Brisbane Summit in 2014. While there are ten principles to the High-Level Principles, this research covers Principle 1 (Legal, Regulatory and Supervisory Framework), Principle 2 (Role of Oversight Bodies), and Principle 4 (Disclosure and Transparency).
Specifically, this research (a) reviews approaches implemented by major countries (Canada, France, Germany, Japan, the Netherlands, the UK, and the US) by referring to the “Annex to the Update Report on the Work to Support the Implementation of the G20 High-Level Principles on Financial Consumer Protection,” and (b) evaluates approaches implemented by the Japanese ministries/agencies and the financial industry in comparison with those of other countries. As for the scope of the analysis, this research focuses on the banking sector and the consumer credit sector, although the Annex Paper covers a broad range of financial services sectors including investment, securities, insurance and pensions in addition to banking and credit.
Chapters 2 and 3 examine the framework of oversight bodies, referred to by Principle 1 and 2. Developments in countries show that, as different financial services sectors started to provide products and services that have similar functions, some countries are seeking to adopt a “function-based” regulation, which means that the same regulation applies to products and services with the same functions, covering different sectors. Furthermore, some of the countries are seeking to introduce a cross-sectoral regulation by means of a unified code. Chapter 4 addresses the latest topics such as facilitating the understanding of consumers through provision of information in layers and presentation of key terms. Chapter 5 considers challenges for Japan to cope with the changing financial services environment, including developments in FinTech.
Keywords: functional approach, information arrangement and provision in layers of key terms