The actions of a Japanese regulator following an outage at the Tokyo Stock Exchange (TSE) has led to calls from the country’s proprietary trading systems (PTSs) to rethink rules governing alternative venues.
A 2 February outage at the TSE lasted from 09.00 to 12.30, local time, affecting 241 names. The bourse spotted “troubles on the market data/market information distribution” at 01.27, over seven hours before the market open, and shut down trading of the stocks at 08.50. But while the Japan Securities Dealers Association (JSDA) – which regulates PTSs – froze the 241 stocks on the country’s alternate venues, the Osaka Stock Exchange (OSE) was permitted to continue trading.
In the fallout from the episode, theTRADEnews.com has learned that management of the country’s leading PTSs met with the JSDA on 7 February to present their case for a change in the watchdog’s policies.
“Members of SBI Japannext’s management team, along with PTS friend Chi-X, visited the JSDA to discuss the issue and collaborate to come up with new JSDA rules suitable for the marketplace,” Chuck Chon, CEO of SBI Japannext, exclusively told theTRADEnews.com. “With alternative trading venues flourishing in the Japanese market, the post-analysis of the JSDA’s decision – which let OSE capitalise in this situation while PTSs were forced to halt 241 stocks – calls for fairness in regulations.”
The PTSs argued that their service as an alternate venue to trade had been negated by the watchdog’s decision to restrict them from participating.
“We are all for great cooperation between venues to ensure that Japan’s equity markets are supported,” said Yasuo Hamakake, representative director of Chi-X Japan, who was hoping the JSDA would evaluate how future scenarios would be treated.
The breakdown occurred at one of the busiest times in Japan’s results season. The eve before the failure, national mainstay Sony posted a US$1.2 billion quarterly loss and Hitachi announced a 45% fall in Q3 net profits.
“In a great majority of cases, the JSDA is completely justified in halting trading – such as in cases when a company is about to announce insolvency or merger and acquisition announcements,” said Chon. “But in this particular incident, related to TSE’s market data technical glitches last week, there was entirely no reason why we couldn’t continue trading. We were fully up and running with our systems and there were no dependencies on our part with TSE’s market data. We could have traded in all of the 241 stocks halted at the TSE.”
Last year, a scandal over losses at camera-maker Olympus proved how PTSs can provide investors with alternate means to trade. On 7 November, when the extent of an alleged cover-up by Olympus top management was revealed in the evening news, trading on the TSE was virtually halted for the next three days, due to what the TSE called “Special Quotation (market order imbalance)”.
From 8 November through to 10 November, Chon said SBI Japannext PTS venue participants were able to actively trade Olympus shares. On 10 November, after three days of continuous day limit lows for the stock, trading at the SBI Japannext PTS venue recorded 278,500 shares – 16% of TSE’s Olympus market share – for the day.
The Olympus affair provided one of the most powerful recent examples of how alternative trading venues can assist in price and liquidity discoveries, stressed Chon. He believed that with global market volatilities on the rise, alternative trading venues can play a significant role in helping to maintain an orderly market for market participants in Japan.
“The events of last week have reignited a healthy debate about regulatory restrictions that limit some investors from accessing liquidity on PTSs,” said Hamakake. “Every investor in Japan – including retail and institutional – should be permitted to access liquidity across all viable markets. Investors should not be restricted from accessing a market that offers a better price or trading on a venue when the primary market is having issues.”
A merger between TSE and OSE was announced 22 November and is currently slated for January 2013.
Last month, SBI Japannext remained the largest PTS in Japan, increasing equity market share to 3.24%, from 2.88% the previous month, while Chi-X Japan increased market share from 2.22% to 2.65%.
TSE’s Arrowhead trading platform, introduced early 2010, was not the cause of the failure, a spokesperson for the bourse said.
At time of press, a spokesperson for the JSDA said the organisation was unable to respond in time for publication.