Tora Adds Short Sale Functionality to Compass to Address New Regs

Tora Compass, the vendor's compliance engine, has been enhanced to prevent users from breaching the JFSA's new uptick rule, which goes into effect on Nov. 5, once the trigger price has been reached, Chris Jenkins, Asia-Pacific managing director at Tora, tells Buy-Side Technology.

"The Japan short-sale rule—aka, the ‘uptick rule'—was originally much simpler," he says. "The uptick rule stipulates that a trader cannot short-sell if a stock was on a downtick—i.e., the last price was lower than the one before. However, with the new short-sale regulations, the uptick rule only applies if the price of the stock falls 10 percent from the previous day's close price. This price—10 percent less than the previous day's close—is referred to as the trigger price. Once a stock trades at or below the trigger price, the new rules state that the uptick rule will apply for the remainder of that trading day, plus the following trading day.

"A trader now needs to track the trigger price to be aware of whether the uptick rule is in effect for a security or not," Jenkins continues. "From a trader's perspective, they may see the new rule as positive as it offers more flexibility for short selling. In other words, now you only need to worry about the uptick rule once the trigger price has been reached. Until that happens, you can short regardless of an uptick or downtick."

But there are technology demands that must be met in order to ensure that buy-side firms stay in compliance with the new rule. Jenkins says market data and network infrastructure must be updated to work with all market data providers. Additionally, new data fields that indicate a security's short-sell status must be integrated and that information must be distributed to clients in real time.

"This requires a robust and flexible infrastructure that can be configured for these new fields and then deliver them to thousands of individual users," he says.

Flexibility a Must
Jenkins say the most daunting challenge for technology providers will be to deliver software upgrades in a timely manner if their solutions are hosted on-site with the end user, rather than delivered through an application service provider (ASP) model, which Compass employs.

"Trading technology providers whose solutions are hosted on-site at the clients are faced with managing hundreds of individual client upgrades, not to mention making changes to dozens of different versions of their applications," he says. "As a result, many trading technology providers will struggle to support these new rules in Japan on a timely basis for their clients."

Jenkins says that when a client places an order in Tora's order-creation interface, there are multiple visual indicators to tell a trader whether the trigger price has been reached. If a short sale is attempted while the uptick rule is live, Compass will present the users with the ability to either cancel or amend their order in order to comply with the new rule.

"This allows the user to quickly react to a change in the tick and get their order in the market, as opposed to receiving a reject, and then needing to create an entirely new order which will take time and could potentially have impact on performance," Jenkins says.