TSE failure compounded by restrictions to back-up venues

A morning outage at the Tokyo Stock Exchange has demonstrated shortcomings in the way venues are regulated in Japan and deprived investors of a choice of back-up venue for trading, alternative venues have suggested.

A morning outage at the Tokyo Stock Exchange (TSE) has demonstrated shortcomings in the way venues are regulated in Japan and deprived investors of a choice of back-up venue for trading, alternative venues have suggested.

The outage, which hit 241 names on the TSE, lasted from 09.00 to 12.30 local time and was blamed by the bourse on “troubles on the market data/market information distribution”.

But while self-regulatory organisation the Japan Securities Dealers Association (JSDA) – tasked with making the call on halting alternate venues from trading certain instruments in irregular market conditions – froze the 241 stocks on the country’s proprietary trading systems (PTSs), it allowed the Osaka Stock Exchange (OSE) to continue trading.

“Situations like to today do not benefit any member of the trading community,” said Yasuo Hamakake, representative director of PTS Chi-X Japan. “Events like this remind us that through greater competition comes market reliability and increased capacity benefiting all investors.”

According to newswire reports, an error was detected at around 08.00 in a server connected to TSE’s Flex information transmission system and the JSDA halted trading PTSs soon after.

Hamakake voiced concerns that a proposed TSE and the OSE merger would cause further market constraints for PTSs. “We need to examine the rules that exist today to ensure that PTSs and exchanges can operate on fair and level playing field.”

The merger between TSE and OSE was announced 22 November and is currently slated for January 2013.

Today’s breakdown occurred during one of the busiest times in the Japanese results season. Yesterday, national mainstay Sony posted a US$1.2 billion quarterly loss ‎and Hitachi announced a 45% fall in Q3 net profits.

“It was unfortunate timing, with some major announcements from issuers. We were anticipating active retail participations in the market. If the TSE closes due to market data issues, we’d seriously contemplate on closing too,” said Chuck Chon, CEO of PTS SBI Japannext. “Liquidity providers of PTSs depend on the primary exchange for pricing.”

In January, SBI Japannext remained the largest PTS in Japan, growing market share to 3.24% of Japanese stocks, from 2.88% in December, while Chi-X Japan increased market share from 2.22% to 2.65%.

The exchange’s Arrowhead trading platform, which was introduced it at beginning of 2010, was not the cause of the failure, a TSE spokesperson said.

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