The $140 million Arrowhead system was rolled out without any problems, traders said. A series of high-profile trading glitches has tarnished the exchange's reputation in recent years.
Long derided as one of the world's slowest major exchanges, Tokyo is now roughly on par with New York and London. The new system processes trades 600 times faster than previously and is able to handle much larger volumes.
The upgrade is aimed at drawing more business from hedge funds and other professional investors, who increasingly rely on sophisticated automated trading strategies.
I think it has the potential to significantly reshape trading in not just Japan, but Asia, said Tokyo-based Neil Katkov, head of Asia research for financial services consultancy Celent.
There is the possibility the exchange will attract a lot more trading, new types of trading, and attention from new types of investors -- in particular, hedge funds.
The new system should allow for more high-frequency trading, where algorithms are used to make thousands of trades in milliseconds, allowing firms to profit from tiny spreads and market imbalances, analysts say.
About 60 percent of equity volume in the United States is from high-frequency trading, significantly higher than Japan. Just 10 percent of global financial firms with high-frequency businesses are active in Tokyo, according to Celent.
With the new system being launched today we will do our best to make the exchange a global financial center, Atsushi Saito, the exchange's president, said at an opening ceremony in Tokyo.
Flanked by about 10 women clad in the traditional Japanese kimono, Saito and other officials cracked open a barrel of Japanese sake to commemorate the launch.
BIG STEP, SMALL TICKS
Developed by Japanese electronics conglomerate Fujitsu Ltd <6702.T>, the 13 billion yen ($140 million) system runs on about 200 servers and is designed to process trades in 5 milliseconds, compared with up to 3 seconds previously.
The new speed is in line with the New York exchange and 2 milliseconds behind London. Tokyo is now able to handle 46 million orders a day, compared with 7 million previously.
This is a very important step given Japan Inc's desire to establish Tokyo as an international financial center, said Trevor Hill, deputy head of Japanese equities at UBS.
Japan's government has long worried about Tokyo's declining importance as a global financial hub, especially compared with fast-rising markets in Shanghai, Hong Kong and Singapore.
At the peak of Japan's asset bubble in 1989, the Tokyo exchange's market capitalization accounted for about 40 percent of the value of global markets. It now contributes just 7 percent, data from the World Federation of Exchanges showed.
Overseas investors are currently responsible for about 40 percent of the trade by value on the first section of the Tokyo exchange, but Celent's Katkov reckons they could play a bigger role because of Arrowhead.
French brokerage Newedge is one of the firms betting it can win more business because of the new trading platform.
We are very hopeful to bring our (existing) clients and new foreign clients to trade more on the TSE, said Julien Le Noble, CEO at Newedge Japan Inc. Le Noble reckons trade volume could increase by as much as 30 percent on the exchange.
A record of 563.7 billion shares were traded on the exchange in 2009, TSE said on Monday.
In tandem with Arrowhead, Tokyo has also reduced tick sizes, the smallest increment by which a stock can move. For instance, investors can now buy or sell shares of Sony Corp <6758.T> at 1 yen intervals, versus a previous tick size of 5 yen.
The reduction of tick sizes comes after stiffer competition from alternative exchanges at home.
Known as proprietary trading systems, alternative exchanges such as those run by SBI Holdings <8473.T> and kabu.com Securities Co Ltd <8703.T> have drawn some business away from the TSE by offering smaller tick sizes as well as faster trades.
SQUEEZING THE LITTLE GUYS
The TSE, which plans to go public after April, is betting on Arrowhead after several embarrassing computer glitches shook investor confidence.
Last month, the exchange was ordered to pay $120.5 million in damages to Mizuho Securities for a botched trade in 2005.
A 2006 accounting scandal at Livedoor Co sparked a massive sell-off of the Internet company. Unable to handle the rush of orders from panicked investors, the TSE had to curtail its trading hours for three months.
Arrowhead could put pressure on Japan's scores of small, domestic-focused brokerages that may not be able to keep up with the technology and investments necessary for high-speed trading.
I think a gap will widen between those that can adapt to the new system and those that cannot, said Tomohiko Hamada, head of program trading at Credit Suisse in Tokyo.
The system will also make it more difficult for traders who may be used to a slower pace.
It will be harder to cancel or correct orders when necessary because of the speed, said Takahiko Murai, general manager of equities at Nozomi Securities.
On Nozomi's small dealing room floor, about 20 dealers executed trades via the system, although one said he found the flashing interface a distraction.
I don't have to change the way I deal. I'll just have to get used to the speed and flashing, colorful screens, he said.
(Additional reporting by Fumiya Mizuno, Nathan Layne, Chikafumi Hodo, Taiga Uranaka and Junko Fujita; Editing by Chris Gallagher, Muralikumar Anantharaman and Lincoln Feast)