Trading Blunder Raises Concerns About the Tokyo Stock Exchange
It began as a stock trader’s nightmare, an error caused by a momentary lapse in concentration perhaps, or a clumsy bit of typing that led to a $331-million loss.
It has since tarnished the reputation of the world’s second-biggest stock exchange and exposed cracks in its electronic trading system. The president of the Tokyo Stock Exchange has said he may resign over the fiasco.
And much of the global investment community is left wondering how vaunted Japanese technology could not overcome a simple human error.
The incident began Thursday when a broker at Mizuho Securities Co. tried to place an order to sell one share of J-Com Co., an otherwise unremarkable job placement firm making its debut on the Tokyo exchange.
The asking price: 610,000 yen, or about $5,100.
No one at Mizuho will speak publicly about exactly what happened. But someone at the securities arm of Japan’s second-largest bank botched the numbers. The sell order was entered as 610,000 shares of J-Com at 1 yen a piece -- less than a cent.
Then the person hit the send key.
Mizuho’s error was a buyers’ bonanza. The big winners were day traders who alerted one another to the opportunity online, and other securities firms, such as U.S. investment bank Morgan Stanley, which emerged at the bell 5 1/2 hours later with a claim to 31.5% of J-Com stock.
The most obvious loser was Mizuho. Having offered to sell 41 times the actual number of J-Com shares, the firm faces the possibility of having to compensate those buyers who couldn’t get stock.
On Monday, Japan’s market regulator estimated Mizuho’s loss at $331 million. But the brokerage firm looks to get at least partially off the hook. After public criticism of the companies that cashed in on the error, six securities firms said Wednesday that they would repay about $141 million. And observers believe Mizuho will recoup a big chunk of its loss from the exchange.
After initially denying any responsibility for the J-Com snafu, exchange executives acknowledged this week that flaws in their electronic trading system prevented Mizuho from correcting its order and minimizing losses. Mizuho traders realized their mistake within 85 seconds of placing the erroneous order and made four attempts to cancel it. It was rejected each time.
The exchange concedes that its software was unable to accept a cancellation order while “buy” orders were coming in. Nor was the system programmed to accept a cancellation order on a newly listed stock.
“We are very sorry to have caused such huge trouble,” exchange President Takuo Tsurushima said at a Tokyo news conference Sunday. “I regard it as a very significant matter and will consider how to take the responsibility, which includes my resignation.”
But the failure was the second major electronic glitch to hit the exchange within the last six weeks. On Nov. 1, a problem with newly installed software designed to improve the Tokyo market’s ability to deal with higher trading volume kept the exchange shuttered for almost an entire trading day.
The breakdowns have come at a particularly sensitive time: A steady run this year has pulled the Japanese stock market out of a long funk. The Nikkei index is now at its highest level in more than five years, with profits up and foreign capital pouring in.
But the Mizuho snafu has made some observers question whether Japan’s trading system needs a hardware overhaul.
“Because Japan’s infrastructure is not up to date, investors could become concerned and some foreign speculators could shun” the Tokyo exchange, said Kenji Tomita, a fund manager at T&D; Asset Management in Tokyo. “Fortunately the market is strong so the mistake was erased. But the root of the problem still exists.”
Other investors question whether the Japanese market is reliable enough to supervise the volume, speed and complexity of modern trading.
Why, they ask, did the exchange allow trading in J-Com to continue until the end of business Thursday, instead of calling a halt and correcting an obviously egregious error? And how could the exchange’s computers not spot a sell order that so grossly exceeded the total number of shares available?
“It was not good that the TSE took so long to find out the cause of the trouble,” said Kiyoshi Kurihara, a leading Tokyo technology consultant who has worked in the U.S. and Japan. “In a way we are lucky: Stock prices are still rising. But if these troubles continue, Japanese capital markets will lose credit and trust.”
The Mizuho trade has revealed the vulnerability of the Japanese securities industry not just to error, but to hackers with havoc on their mind.
“There is a possibility for some hackers to get past holes in security,” Tomita said. “If the TSE missed such obvious mistakes, it could happen.”
The back-to-back computer glitches were also a blow to Fujitsu Ltd., a high-profile Japanese technology firm that developed the exchange’s software.
The company docked the pay of top executives as punishment for the embarrassing failure of its new software program Nov. 1.
Fujitsu’s stock dropped 0.8% on Tuesday. But shares in its biggest competitor made their largest gain in 29 months. The price of NTT Data Corp. shares jumped 11%, partly on a belief that the credibility of Fujitsu’s software had been shaken.
Naoko Nishiwaki of The Times’ Tokyo Bureau contributed to this report.