Bloomberg News

Glitch at TSE No Payday for Japan’s Alternative Trading Venues

February 14, 2012

Feb. 3 (Bloomberg) -- Japan’s alternative trading platforms missed out on a potential payday as regulators stopped them from fielding orders when a computer error caused the biggest trading disruption in six years yesterday at the Tokyo Stock Exchange.

The glitch at TSE disabled trading of 241 companies including Sony Corp. for 2 1/2 hours. Japan’s biggest bourse hasn’t yet been able to measure the impact on trading, Chief Information Officer Yoshinori Suzuki said yesterday in Tokyo. The Japan Securities Dealers Association shut trading on alternative platforms SBI Japannext and Chi-X Japan on concern shares couldn’t be priced fairly without the main bourse, said spokesman Atsushi Sakiyama.

The malfunction in a server and its backups was Tokyo’s worst since 2006, a year before alternative venues started in Japan. The disruption came as the Fair Trade Commission reviews the effect on competition of a planned merger between the exchanges in Tokyo and Osaka, where transactions went on as normal.

“Investors don’t want those other platforms shut,” said Edwin Merner, president of Tokyo-based Atlantis Investment Research Corp. “People always want to have a market of some kind, even if they don’t use it. They want to have it there. It makes better liquidity and it shows fairness.”

The glitch at TSE occurred the day after European Union regulators vetoed Deutsche Boerse AG and NYSE Euronext’s plan to create the world’s biggest exchange, concluding the merger would hurt competition. Populist outcry, antitrust concern and some of the most volatile markets on record prevented the completion of six proposed transactions valued at more than $37 billion involving public exchange companies in the past year, according to data compiled by Bloomberg on deals of $1 billion or more.

‘Fully Operational’

Chi-X Japan was “fully operational” and could have executed orders had the regulator not stepped in, said Yasuo Hamakake, representative director for Chi-X Japan in Tokyo. SBI Japannext was also capable of processing trades during the outage, said Chief Operating Officer Hiroshi Sensaki.

Shares of Sony, which announced Feb. 1 that it was replacing Chief Executive Officer Howard Stringer, could still be bought and sold on the Osaka Securities Exchange during the Tokyo halt. Osaka wasn’t affected because it uses a different system, according to Masahiro Yada, an Osaka spokesman.

Shares of the electronics company rose 0.7 percent in Osaka during that time, when volume in the stock was 150 times the three-month average for the bourse, according to data compiled by Bloomberg. Sony fell 2.6 percent in Tokyo after trading returned to normal at 12:30 p.m. and closed the day 5.2 percent lower in Osaka.

‘Appropriate Pricing’

“We made the judgment to halt off-exchange trading because we were afraid appropriate pricing might not be made with prices unavailable through the TSE,” JSDA’s Sakiyama said by phone. The broker’s association, which regulates securities firms and off-exchange venues, will consider allowing trading when the main exchange malfunctions depending on feedback from investors, he said.

The association has no authority over Japan’s traditional exchanges in Tokyo, Osaka, Nagoya, Fukuoka and Sapporo.

Off-exchange venues, which last handled 7.8 percent of Japan’s trades, have shown their worth on days when individual stocks were unable to be bought and sold in Tokyo. Four times as many shares of Olympus Corp. traded away from the main bourse after a rush of sell orders forced Tokyo to cancel its opening auction on Nov. 10, when the scandal-hit optics maker was warned it might be delisted.

Alternative Venues

Still, alternative venues might not have received extra business yesterday even if the platforms had been allowed to take the orders, according to SBI Japannext’s Sensaki. When Tokyo went down, investors turned off their so-called smart- order routers, which use computer programs to find the cheapest places to trade, he said. Many of those algorithms don’t work without the main bourse as a reference point.

“In theory, it is clear that the market should have some venues available,” Sensaki said. “In reality, the whole system is architected around the primary exchange. The Japanese market needs to evolve.”

Tokyo Stock Exchange Group Inc. and Osaka Securities Exchange Co. cited cost savings from integrating computer systems as a reason for merging when they announced the deal on Nov. 22. Osaka may review system arrangements before a merger with Tokyo, spokesman Masahiro Yada said by phone after the outage.

“Even though the PTSs were ready, willing and able to trade - the regulator decided not to let them,” Glenn Lesko, chief executive officer in Asia for Instinet told Bloomberg News. “It’s a new experience and there’s no explicit regulation to guide the market.”

--With assistance from Satoshi Kawano and Masaaki Iwamoto in Tokyo, Masatsugu Horie in Osaka and Joanna Ossinger in New York. Editors: Jason Clenfield and Nick Gentle.

To contact the reporters on this story: Eleni Himaras in Hong Kong at; Yoshiaki Nohara in Tokyo at

To contact the editor responsible for this story: Nick Gentle at

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