The Tokyo Stock Exchange launched an accelerated trading system on Monday to better compete with major global rivals in the growing field of high-speed trading.

Long derided as one of the world's slowest major exchanges, Tokyo is now roughly on a par with New York and London. The new Arrowhead system is supposed to process trades 600 times faster than previously and to be 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.

Analysts say the 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.

I think it has the potential to significantly reshape trading in not just Japan, but Asia, said 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.

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 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 2 to 3 seconds previously.

The new speed is in line with the New York exchange and a millisecond 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.

In tandem with Arrowhead, Tokyo has also reduced its tick size, 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 the previous tick size of 5 yen.

The reduction of the tick size 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.

SPEED RISK

While the faster system makes it easier to do arbitrage trading -- trades that take advantage of price differences -- it also presents new risks, said Takahiko Murai, general manager of equities at Nozomi Securities.

It will be harder to cancel or correct orders when necessary because of the speed, he said.

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, said the dealer.

The TSE, which plans to go public after April 2010, is betting on Arrowhead after several embarrassing computer glitches tarnished its image with investors.

In December, 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.

(Additional reporting by Fumiya Mizuno, Nathan Layne and Junko Fujita; Editing by Chris Gallagher and Joseph Radford)

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