Increasing Use of Electronic Trading Systems and Its Implications on Japanese Financial Markets

With the advances in IT technology, more and more transactions are shifting to electronic platforms even in financial markets. Electronic trading systems were first adopted in the United States, and have subsequently spread to Europe and Japan. More and more products are traded electronically, including government securities as well as equity and foreign exchange. This paper examines recent developments in electronic trading systems and their implications on the Japanese government securities and foreign exchange markets, taking cue from a recent study by the G10 central banks ("The Implications of Electronic Trading in Financial Markets", January 2001). In Japan, electronic trading accounts for a large percentage -- about 90 percent -- of all trades between foreign exchange dealers. In contrast, electronic trading has not yet captured a large share of neither foreign exchange transactions between dealers and customers nor transactions in government securities (in neither interdealer nor dealer-customer segments). While electronic trading has the potential to enhance operational efficiency and price discovery functions, such issues as enhancing market liquidity, automating operation processes, and ensuring the contestability of electronic trading services need to be addressed to obtain the full benefits.