BofA Securities Japan Co., Ltd.
Revised on December 14, 2023
Best Execution Policy
This Best Execution Policy sets forth our policy and execution methods for client execution on the best terms in accordance with the Financial Instruments and Exchange Act (“the FIEA”) Article 40-2, Paragraph 1.
Upon acceptance of a client order for securities listed on a financial instruments exchange in Japan, we will endeavor to execute that order in accordance with the following policy, unless we receive any specific instructions from the client in relation to order execution.
1. Securities Covered
The securities subject to this Best Execution Policy are “Listed Share Certificates, etc.,” as prescribed under Article 16-6 of the Financial Instruments and Exchange Act Enforcement Order including but not limited to, stocks, bonds with stock acquisition rights, ETFs (beneficiary certificates in investment trusts), and REITs (investment certificates in real estate investment trusts) and the like, which are listed on a financial instruments exchange in Japan.
We do not accept orders for “Tradable Securities” as set forth in Article 67-18 (iv) of the FIEA including, but not limited to, stocks and bonds with stock acquisition rights etc. of Phoenix issues.
2. Best Execution Methods
Definition of Terms:
- Proprietary Trading System (PTS):Alternative trading platform stipulated in Article 26-2-2, Paragraph 7 of the Financial Instruments and Exchange Act Enforcement Order where execution of orders takes place outside of a financial instruments exchange. We route orders to PTSs operated by Japannext Co., Ltd. and Cboe Japan Limited.
- Dark Pool:Internal crossing system operated by financial instruments business operators etc. stipulated in Article 70-2, Paragraph 7 of Cabinet Office Ordinance on Financial Instruments Business, etc., which uses electronic information processing to simultaneously determine the terms of transactions or other conditions of transactions or perform similar acts with several parties as a buyer or seller, and excludes PTSs. We provide a crossing system called JP Instinct X® (hereinafter referred to as “Instinct X®”) as a Dark Pool to professional investors stipulated in Article 2, Paragraph 31 of FIEA (hereinafter referred to as “professional investors”). Instinct X® matches clients’ buy and sell orders at or between the prevailing best bid and offer of Tokyo Stock Exchange (hereinafter referred to as “TSE”), and such matched orders are routed to and executed as a cross transaction on TSE’s ToSTNeT..
- Smart Order Router (SOR):SOR selects the most favorable venue among multiple venues. Our SOR, called PRISM, routes orders to a financial instruments exchange, PTS, or Instinct X® (hereinafter referred to as “financial instruments exchange markets, etc.”) based on its automatic decision. We provide our SOR to professional investors.
- Latency Arbitrage:Trading strategy that takes advantage of price fluctuations at financial instruments exchanges, disparities between venues, etc. caused by differences in the time required for order execution as prescribed under Article 124, Paragraph 2-1-(iii) of Cabinet Office Ordinance on Financial Instruments Business, etc.
The following summary sets out our best execution methods.
(1) Execution of Orders from Clients Who Use PRISM
Orders will be placed on one of the financial instruments exchange markets, etc. based on PRISM’s automatic decision. Securities eligible for PRISM are Listed Share Certificates, etc. listed on the TSE.
(i) Financial Instruments Exchange Markets, etc. of which PRISM Compares Prices1:
(a) TSE
(b) PTS operated by Japannext Co., Ltd.
(c) PTS operated by Cboe Japan Limited
(ii) Methods and Priority Employed by PRISM for Selecting Financial Instruments Exchange Markets, etc. (Order Routing Rule):
(a) PRISM routes orders to the most appropriate financial instruments exchange market, etc. considering the price, probability of execution, liquidity of the market, etc. However, orders from a client who has selected Instinct X® as one of the execution venues in PRISM will first be routed to Instinct X® (limited to when matching in Instinct X® is enabled). Regardless of the above, orders to be executed at the time of TSE’s market open or close, or placed with “on open” or “on close” conditions will be routed only to the TSE.
- Price – which financial instruments exchange market, etc. offers the most favorable price (considering market impact and potential for price improvement)
- Probability of Execution – which execution venue or combination of venues offers the greatest probability of execution (considering the execution probability of any residual quantity); and
- Liquidity of the Market– the size of an order, in absolute or relative terms compared with the market trading volume
(b) When multiple financial instruments exchange markets, etc. offer the same most favorable price, orders will be routed in the following order: 1) TSE, 2) PTS operated by Japannext Co., Ltd., and 3) PTS operated by Cboe Japan Limited.
(iii) Measures against Latency Arbitrage:
When placing orders of multiple trading units in slices, such orders will be placed to the TSE and PTS(s) simultaneously, and the orders to PTS(s) will be placed as IOC orders (Immediate or Cancel order: an order that will expire if it is not executed immediately) as a measure to protect against latency arbitrage.
(2) Execution of Orders from Clients Who Do Not Use PRISM
Unless there is any specific instruction from a client with regards to the financial instruments exchange markets, etc. in how an order should be executed or the execution method (example: request for us or our foreign affiliates to act as a direct counterparty of the transaction, etc.), we will route the order as an agency order to a domestic financial instruments exchange where the securities are listed. Orders received from a client outside of trading hours will be routed to a financial instruments exchange after trading restarts on that exchange, unless there is any specific alternate instruction from the client.
The only financial instruments exchange we place agency orders on is the TSE.
Orders placed by professional investors who have agreed to use, and instructed to execute the orders on Instinct X® will be routed only to Instinct X®.
3. Reasons for Selecting the Relevant Execution Methods
(1) Execution of Orders from Clients Who Use PRISM
We place client orders to PTSs in addition to the TSE, as we consider it reasonable to make venues other than financial instruments exchanges available for clients to achieve better execution results, as trading volume on PTSs has been increasing in recent years. Order executions through PRISM, which instantaneously searches the latest quotes and automatically decides the execution venue to be routed to out of multiple financial instruments exchange etc., are considered to contribute to an optimization of execution price and an improvement in execution probability, which will lead to better execution results for clients. Additionally, with regards to orders from a client who has selected Instinct X® as one of the execution venues in PRISM, we consider it reasonable to first route such orders to Instinct X® without leaving them on the order book of a financial instruments exchange market, etc. in order to reduce market impact. In the case where multiple financial instruments exchange markets, etc. offer the same most favorable price, our order routing logic is set up to increase the execution probability, taking into account such factors as market impact and liquidity.
Regarding our measures against latency arbitrage, we consider the usage of the method described in 2. (1) (3) above to be effective in reducing the predictability of which financial instruments exchange markets, etc. an order will be routed to.
(2) Execution of Orders from Clients Who Do Not Use PRISM
Unless there is any specific instruction from a client with regards to the financial instruments exchange markets, etc. in which an order should be executed or the execution method (example: request for us or our foreign affiliates to act as a direct counterparty of the transaction, etc.), in general, we consider a financial instruments exchange, as compared to an off-exchange trade, to be a superior venue in terms of liquidity, execution probability, execution speed, etc. We have therefore determined that execution on an exchange is most reasonable for clients.
4. Others
(1) Notwithstanding 2. above, we will execute the following types of transactions as indicated below:
(i) A transaction for which we have received a specific instruction from the client concerning the execution method (examples: request for us or our foreign affiliates to act as a direct counterparty of the transaction, to cross the order with another client’s order, to execute the order on a specific financial instruments exchange, to place the order on a PTS, to route the order to Instinct X®, to execute the order during a specific time period, or transact each execution at specific timings, etc.):
Will be executed as instructed.
(ii) A transaction under a discretionary agreement, etc. which we perform as Type 1 or Type 2 Financial Instrument Exchange Business:
Will be executed by a method of our choice within the range of discretions permitted under the contract.
(iii) Odd-lot shares or shares of less than a trading unit:
Will either be executed by placing the order with a financial instruments business operator that handles odd-lot shares or the shares in a quantity that is less than a trading unit, or executed as an off-the-exchange trade where we or our foreign affiliate act as a direct counterparty.
(2) In cases of emergency, such as a systems failure or otherwise, we may have no alternative but to execute an order using a method other than the methods that should have been selected based on this best execution policy. Even in such cases, we will endeavor to execute on the best terms possible at the time.
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The duty of best execution does not only relate to price but also involves the consideration of various factors including cost, speed, and probability of execution. Therefore, a trade that in hindsight appears to not have been executed at the best possible price does not by itself necessarily constitute a violation of the duty of best execution.
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1Although PRISM routes orders to Instinct X®, it does not compare prices at Instinct X® with prices at other financial instruments exchange markets, etc.