TSE glitch a boon for alternative trading platforms

by Eleni Himaras and Toshiro Hasegawa

Bloomberg

The Tokyo Stock Exchange’s worst technical glitch in six years has forced a rethink of the role alternative trading platforms play in ensuring trade in shares of global corporations continues.

A Feb. 2 computer malfunction that halted trading on 15 percent of the bourse’s biggest stocks was exacerbated when the Japan Securities Dealers Association asked alternative venues to stop processing transactions.

The broker’s association will from this month allow platforms such as Chi-X Japan and SBI Japannext to keep trading if the TSE is disrupted, said Ryuichi Yamamoto, a manager of proprietary trading rules at the association.

The policy comes in response to complaints from investors who were unable to trade 241 companies for 2½ hours while Tokyo scrambled to fix its computer system, according to Yamamoto. The association had no backup plans in place prior to the February incident, he said.

“We gathered a variety of opinions from people in the market and we were told that the alternative venues are providing a valuable substitute service in other countries,” Yamamoto said Thursday. “We decided that in the future they should keep running to allow trading even when there are system problems on main bourse.”

The growth of Japan’s propriety trading platforms has lagged behind similar businesses in Europe and Canada because of regulations that treat them differently from traditional bourses, according to Deutsche Bank AG and Nomura Holdings Inc. Alternative venues last year handled 7.8 percent of the trades on the Topix index, but they accounted for about 25 percent on Britain’s benchmark London Stock Exchange.

Obstacles to growth include the so-called 5 percent rule, which requires investors to make a takeover bid if they acquire more than 5 percent of a company through off-exchange transactions involving more than 10 shareholders. No such regulation exists for the main bourses.

The February glitch meant investors couldn’t trade stock in Dai-ichi Life Insurance Co. or retailer Aeon Co., which aren’t listed on the Osaka Securities Exchange or other regional bourses that kept running during the outage.

Sony’s share volume on the Osaka exchange that day was 150 times the three-month average, data showed. Investors diverted orders to Japan’s second-largest bourse after the electronics maker a day earlier said it was replacing CEO Howard Stringer.

Trading on Japan’s new platforms was halted by the broker’s association, which said stock prices couldn’t be set fairly without the main bourse. The association has no jurisdiction over traditional exchanges.

“People need to think about the business continuity plan case when the exchange system goes down,” said Hajime Sato at SBI Japannext in Tokyo. “The glitch triggered a lot of constructive debate among brokers and also investors.”

Japan’s alternative platforms include Chi-X Japan and SBI Japannext, which show prices and are open to individual investors, and more than a dozen so-called dark pools, which allow buyers and sellers to be anonymous.

The platforms last year saw their market share grow the most since their creation in 2007.

Off-exchange trading has shown its worth on other days when individual stocks were unable to be bought and sold on the TSE. Four times as many shares of Olympus Corp. were traded outside the benchmark index after a rush of sell orders forced the Tokyo bourse to cancel trading of the stock Nov. 10, when the scandal-hit camera and optical equipment maker was warned it might be delisted.

“Trading on proprietary platforms really increased last year and that’s raised interest in them,” Yamamoto said. “The problems on the TSE got the market thinking about changing the rules.”