Merc Probes Japanese Trading Practices

The nation’s two largest futures exchanges say they are studying the trading practices by some Japanese brokerage houses and one, the Chicago Mercantile Exchange, said it had been aware of questionable practices “for some time.”

Last week, the exchange said, it fined a St. Louis brokerage firm $100,000 for its alleged involvement. The firm, Clayton Brokerage Co., neither admitted nor denied guilt and declined to comment Tuesday.

The investigations center on whether Japanese brokers have used private, non-competitive trading to reduce margins, the amount of money they are required to set aside to cover potential losses from trading.

The Merc charged the Clayton firm with not requiring the proper margins from some Japanese investors.

Frederick Grede, the Chicago Board of Trade’s vice president for administration, said his exchange’s margin rules are different from those of the Mercantile Exchange and that, as far as he has been able to determine, none of its rules have been broken.

Grede said several brokerage houses apparently conferred at the end of the Japanese business day and matched buy and sell orders that had not been completed.

They informally agreed to a deal, then accomplished the trade the next day on a U.S. exchange while holding the margin money in Japan, he said.

The practice came to the attention of the Board of Trade when some U.S. brokerage houses told of receiving orders from Japan to buy and sell the same futures contracts for the same account.

Merc spokesman Andrew Yemma declined to elaborate beyond saying that his exchange was investigating the situation.