After years of stagnation and insularity, Japan’s buyside is now catching up fast. At Nomura Asset Management, Mai Tanaka and her team are helping to drive the country’s trading transformation

To encounter Mai Tanaka at the FIX Japan Electronic Trading Conference in Tokyo in October is like watching a celebrity in their element. The crowds part, heads turn and the audience of brokers, vendors and venue executives hang on her every word. And so they should: As global head of trading at Nomura Asset Management, Tanaka makes the ultimate procurement decisions for broker commissions, venue choices and trading systems across the company’s $664 billion portfolio.

Tanaka’s role is even more important in the context of current developments in Japan. This is a country where until last year, the Japanese Financial Services Authority required paper records of trade orders, and buyside firms still communicate by fax.

After years of financial sector insularity and stagnation, Japan is going through one of its habitual episodes of rapid reform and openness to foreign ideas – in particular, electronic trading. Tanaka has made her commitment to that process clear by taking on the role of regional co-chair at FIX Trading Community, an organization whose purpose is to develop electronic messaging protocols.

Tanaka’s path to the top was not obvious at first, when she started her career as an FX trader at a succession of domestic Japanese firms. But things took off when she joined Nomura’s buyside operation, and began to gain a far broader range of experience. “At Nomura, I began trading FX, foreign bonds and futures and subsequently worked across a wide range of products, including short-term money market products, repo and securities lending, and Japanese equities”.

But it was a stint in London that gave Tanaka the crucial knowledge that prepared her for Nomura’s top buyside trading role. “I later served as a country manager in the UK desks and UK trading team, and returned to Tokyo to take up my current role in 2023”, she told Global Trading.

From the outside, Nomura Asset Management appears complex. There are about 700 Nomura AM mutual funds with $400 billion total AUM, ranging from Nomura’s flagship $90 billion Nikkei ETF to dozens of smaller funds. Less visible are about $260 billion of pension fund assets not listed as mutual funds.

With such complexity, it is no surprise that Tanaka needs a over 30-strong trading team. “In Tokyo, the team is split into two execution teams on the equity side and the fixed income side”, she explains. “Each team is then divided by product related to listed trading and the OTC trading”.

Overseas, Nomura Asset Management has a leaner trading footprint. “We have a UK, Singapore, Malaysia, Hong Kong and Shanghai trading office”, Tanaka notes. As for the US, Nomura AM has no trading presence there at all.

The need to communicate

When compared with Nomura AM’s global army of portfolio managers, analysts, back-office staff and salespeople, Tanaka’s team appears small, but she has to communicate with them all. “We work closely with portfolio managers on a day-to-day basis, and also liaise with the post trading team, and we also have a regular interaction with sales team and the client relationship and client reporting teams”, she explains.

Part of Nomura AM’s complexity is the diversity of trading styles and wrappers, but the traders have to handle all of it, according to Tanaka. “We have both active and passive portfolios across equities and fixed income”, she says. “ETFs are also a key area of focus for us and each market links its own execution constellation”.

There are ample opportunities for career development with such a portfolio, Tanaka adds, while her firm’s strategic priority to grow fees helps this process. “Our traders benefit from exposure to flow across the whole spectrum, which is an excellent experience for us. The passive side is bigger than the active side, but we encourage to get the new flow to the active side. This is our purpose”.

A time-honoured question for buyside traders is the allocation of trading alpha to traders versus portfolio managers. Nomura AM offers alpha opportunities to traders, without emphasising it too much. As Tanaka puts it, “We don’t carry a specific numeric, P&L target for trading alpha”, she says. “But everyone understands that generating trading alpha is part of the traders limit, so we monitor it continuously and also feedback execution results to PMs on a daily basis, and over defined peers as well”.

But first, the alpha has to be measured, and Tanaka explains how the challenges vary across asset classes. “I think Japanese equity is where we have greatest frequency of our trading, she says. “For Japanese equities, it’s easier to see the Alpha against the VWAP basis, or the benchmark basis, so the active equity portfolio manager gives some discretion to us in using the block trade, or which venues we use, or which brokers we use”.

Achieving this precision involves vendor tools, and Tanaka’s colleague Kenji Takeda, who runs equity trading within her team, provides more colour. For pre- and post-trade analytics, Nomura AM uses Bloomberg TCA (BTCA), while for passive execution, the firm uses Quick, a domestic vendor whose platform is widely used by the Japanese buyside for pre-trade analysis of principal flow for their passive funds.

Broker relationships

When it comes to brokers, on the equity side, Tanaka’s job is complicated by the fact that has to operate both within multiple regulatory regimes. “Our key regulatory constraint is that we have to comply with MiFID2 because we have investors from overseas”, she explains. “We have clients in Europe, and the UK, where unbundling remains a requirement under MiFID 2. But broker services in Japan are typically bundled, so reconciling this regulatory difference to meet client requests has been a real headache for us”.

When asked about the top brokers she uses, Tanaka reveals that sophisticated global banks are wooing Japan’s buyside with algos. “It’s difficult to single out brokers, but for Japanese equities, global financial institutions have invested heavily in algo development and those undoubtedly are influential in Japanese equity markets and among the domestic security firms, including our group”.

Tanaka credits corporate sibling Nomura Securities for competing in this algo arms race. “They are serious about securing an edge in the own exchange market. This is Japan, their own mother market, and are putting their capital into algo development too”. For the rest of Japan’s sell side, Tanaka has a diplomatic message. “We want domestic brokers to thrive, so we will continue to provide constructive feedback and support to the domestic securities firms”, she says.

One problem faced by Japanese buy side investors is the gaming risk arising from thin liquidity on lit market, which is attributable to the high participation rate of HFT firms.

Read more: Japanese buyside traders seek defence against HFT – Global Trading

Tanaka says that Nomura AM is starting to turn to newer electronic liquidity providers to mitigate the problem. “We use the liquidity providers as well. And I think their liquidity is a good solution to minimise the execution cost. So we seek their liquidity. They actually have a strength in bilateral trades”.

“It depends on the portfolio manager’s instructions, but while we mainly use the algos, sometimes we use bilateral trades for block trading. And we find that bilateral matching trades are often even more effective for reducing costs, a block trade is the best way to reduce the cost”.

Japan’s fixed income upgrade

For fixed income, Tanaka’s experience in London provided insights she is now deploying in her home market. “From my time in the UK, the most notable difference was the depths of the credit market, and Japan’s bond market has only recently begun to attract more foreign investor flow following the BOJ move from negative interest rates to the positive one”, she says. “But even in Japanese Government Bonds (JGBs) the dominant participants remain domestic investors, and the domestic bias is even stronger in the Japanese credit market”.

Tanaka believes that a combination of reform and improved technology will help Japan’s bond markets catch up. “The UK credit market I worked in is considerably deeper and with many more participants and a much larger universe of issuers”, she notes. “I believe that electronic trading is essential to capture broader investors flow, and that development of the repo market is also an important enabler for the credit market”.

Some factors are out of her control, she admits. “However, many Japanese corporates are cash rich and have little need to fundraise by issuing bonds, and investors often tend to buy and hold credit”, she points out. “These structural features mean change will take time”.

But before electronic trading in bonds can happen, Tanaka knows that she needs to measure the trading outcome, which is a tough problem. “For FX and fixed income, it’s so challenging to calculate the execution cost and alpha”, she says, with a sense of exasperation.

“For bonds, we perform the post trade analysis, but we are still exploring the best way to carry it out on the bond side, because it’s so difficult, it’s so challenging for us to see that. First, what is the fair price at the moment? What is the cost?”

From the perspective of vendors, Nomura AM is a huge opportunity because Tanaka is still making up her mind about who to work with in fixed income. “It’s challenging because we are still checking, not only big vendors, but also the TCA specific ones. They have a specific expertise in the TCA and have lots of strategies, so which is the best one? We are checking and hearing the details of these companies”.

This need for diligence is frustrating because electronic bond trading is already growing fast in Japan. “In bonds at this time, the electronic trading volume is higher than ever”, she explains. “Around 40% of the trading volumes is electronic. So that market is changing, we are still using voice trading for some big government bond trades.

In terms of bond platforms, a Godzilla versus King Kong type battle is already shaping up between domestic incumbent Yensai, owned by a consortium of domestic securities firms, and outside upstart Tradeweb, a battle that Tanaka is watching closely from the sidelines. “Tradeweb are chasing JGB volumes at Yensai, to win flow by offering a platform to global clients”, she says.

The missing Japanese consolidated tape

Meanwhile, Tanaka is also paying close attention to changes in Japan’s equity markets, where the Topix index recently hit an all-time high. “In Japanese equity markets, the Tokyo stock exchange (TSE) is driving market reform, and I believe those efforts are one of the reasons that overseas investors are coming into the Japanese equity market recently” she says. “They also introduced the auction mechanism to the TSE last year, and I expect further measures will be considered”.

Unlike electronic trading in bonds, for Japanese equities electronic trading has brought in high-frequency trading firms that are blamed for market impact problems by the buyside. With HFTs watching their every move, market participants are reluctant to provide liquidity. “In equities, the liquidity and the depth of the market are different from the other developed countries, the Japanese market has less liquidity and the depth of the market. So we want to see more inflows from the much larger universe of the world. We’d like to see a consolidated tape here. That transparency is the one of the best solutions to the participant”.

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