Bloomberg News

TSE’s Osaka Deal Marred by Share Fall, Regulator Scolding

August 24, 2012

The Tokyo Stock Exchange Group Inc.’s purchase of its Osaka rival is off to a rocky start.

Just one day after winning control of Osaka Securities Exchange Co., the president of Japan’s biggest bourse and three other executives had their pay docked after the company was reprimanded by regulators for computer errors that disrupted trading twice in the last seven months. Shares of the Osaka exchange plunged by a record 16 percent yesterday amid speculation the merger will hurt profit.

Combining the Tokyo exchange, which handles 88 percent of Japan’s equity trades, with the only domestic venue for futures on the Nikkei 225 Stock Average is part of a national plan to reinvigorate the country’s exchange industry. Six months after the failure of backup systems caused the Tokyo exchange’s worst trading disruption in six years, a similar malfunction on Aug. 7 caused a 95-minute halt to the bourse’s derivatives trading.

“It wouldn’t be a surprise if investors are starting to worry that a merger with the TSE would cause some system problems for the OSE,” said Hiroaki Hiwada, a strategist at Tokyo-based Toyo Securities Co. “The market may be starting to price in concerns about the costs to prevent the merged company from system errors.”

The Financial Services Agency said the Tokyo exchange didn’t do enough system checking after the February disruption, which stopped trading of 241 securities including Sony Corp. for more than three hours. The bourse needs outside experts to inspect its countermeasures and to report progress regularly, a spokesman for the regulator said in Tokyo, declining to be named due to official policy.

Pay Cut

Minutes after the FSA statement, the Tokyo Stock Exchange cut President Atsushi Saito’s salary by 30 percent for two months. General Manager Hiroyuki Iwakuma, Chief Information Officer Yoshinori Suzuki and Yasuhiro Yoshida, and executive officer, will be docked 30 percent of one month’s pay. Two managers in the information technology department received so- called strict admonishments.

“The TSE will figure out a solution for the system trouble alone, not together with the OSE because we have to figure out a solution as early as possible,” Suzuki said at a press conference yesterday. “This system trouble will not directly affect talks on derivative-system integration between TSE and OSE.”

Osaka spokesman Masahiro Yada declined to comment on the smaller company’s share plunge or on the system errors at the Tokyo exchange.

The TSE said Aug. 23 that Osaka shareholders offered to sell 80 percent of the smaller bourse’s stock at 480,000 yen per share. That was more than the 67 percent the TSE sought in a tender offer that closed the day before. Shares of Osaka slid 0.7 percent from Nov. 22 when the deal was announced through Aug. 23. The companies project the deal will close in January.

Targets Cut

UBS AG analyst Mariko Watanabe cut Osaka’s target price to 300,000 yen from 390,000 yen citing the prospect of lower profitability after the tie-up. Deutsche Bank AG on Aug. 23 lowered its 12-month price estimate for the bourse to 350,000 yen from 449,000 yen, according to data compiled by Bloomberg. The stock closed at 367,500 yen on Aug. 24.

Osaka’s J-Gate derivatives system uses technology from Nasdaq OMX Group Inc. and hasn’t had a major error since it began operations in February 2011, Fumihiro Yada, a spokesman for Osaka Securities Exchange, said Aug. 7. Some firms reported that placed options orders didn’t appear on the system in February this year, Yada said.

Effective control of the Osaka exchange means the Tokyo bourse won’t need the support of other shareholders to approve the deal. While regulators around the world have blocked more than $30 billion in other mergers since 2010, the marriage of Japan’s two largest equity-trading venues is part of a national plan to consolidate the country’s fragmented exchange industry amid competition from China and other emerging markets.

Government Plan

Japan’s government said in 2010 it wanted to create a “comprehensive” exchange that combined the country’s nine bourses into a single entity handling stocks, commodities and other securities. The country’s Financial Services Agency was involved in discussions between TSE and Osaka before the deal was announced, two people with direct knowledge of the talks said in March.

The Aug. 7 error took place somewhere in Tokyo’s Tdex+ system used to trade derivatives at the bourse, not Arrowhead that handles cash equity transactions, Hiroki Kawai, director of information technology planning and corporate strategy at TSE, said that day. A switch that was supposed to automatically activate backup systems didn’t work and all derivatives trading was halted for about 95 minutes. A failure of backups was blamed for the February crash as well.

“The market is concerned whether there will be hidden problems from the merger,” said Yuuki Sakurai, chief executive officer at Tokyo-based Fukoku Capital Management Inc., which manages 1.5 trillion yen ($19 billion) of assets. “We have to wait and see how far they will be capable of managing the trading if volume starts to increase.”

To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net;

Yoshiaki Nohara in Tokyo at Ynohara1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net


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