Second system error of year

95-minute glitch halts TSE derivatives trading

Bloomberg

Tokyo Stock Exchange Group Inc. said a computer error Tuesday halted trading of Topix index futures, Japanese government bond futures and options trading for about 95 minutes, the second time in seven months a malfunction has forced a shutdown.

The failure lasted from about 9:20 a.m. to 10:55 a.m., the bourse operator said. Index shares were 20 percent below average for the time of day after the Topix and JGB futures were halted. Ten-year JGBs fell during the breakdown.

The exchange suffered its biggest disruption in six years on Feb. 2 as a glitch halted trading for 3½ hours in some of the country’s biggest companies.

Tokyo’s second major trading-system outage this year comes a week after Knight Capital Group Inc. was taken to the brink of bankruptcy after a computer malfunction spewed orders through U.S. exchanges on Wednesday, causing a $440 million loss. Tuesday’s glitch is a further setback for the Tokyo bourse as it seeks to take over its smaller Osaka rival, which dominates Japan’s equity and equity-index derivatives businesses.

“This shouldn’t be happening, and it’s a risk for investors that they can’t trade when they want to,” said Kazuyuki Terao, chief investment officer of RCM Japan Co. RCM oversees about $153 billion globally. “A system error happened earlier as well, and I have to have reservations about what’s going on.”

The error took place somewhere in the Tdex+ system used for derivatives at the bourse, not Arrowhead, which handles cash transactions, said Naoya Takahashi, a TSE spokesman. Tokyo started using Tdex+, based on NYSE Euronext’s Liffe Connect platform, for options trading in October 2009 and for futures last November. Osaka’s J-Gate derivatives system uses technology from Nasdaq OMX Group Inc.

Volume on the Topix was about 20 percent below the 10-day average for the time of day when derivatives resumed trading. Average daily turnover for futures on Japan’s broadest measure of stock performance was ¥737 billion ($9.42 billion) in June, the Tokyo bourse said.

“The failure of Topix futures reduced the number of people doing index arbitrage,” said Naohide Une, head of equity derivatives trading at Goldman Sachs Japan Co. “That’s why the system error is not only affecting futures, but making cash-equity trading thinner. I thought lower volume could cause unusually big moves in stocks, but what actually happened was market participants were holding back trading.”

The breakdown forced people to use Nikkei 225 stock average futures in Osaka, the only place in Japan where contracts on the benchmark index are traded, said Yuji Nakagawa, manager of derivatives trading at Toyo Securities Co. in Tokyo. Osaka Securities Exchange Co. reported daily average turnover of ¥1.29 trillion in contracts and mini contracts on the Nikkei 225 during June.

“It just prompted people to buy back short positions on the Topix using Nikkei 225 futures, because Nikkei 225 futures and cash are still being traded,” said Toyo Securities’ Nakagawa. “I haven’t seen a major effect.”

The Tokyo bourse reported that an average of 45,537 10-year JGB futures changed hands in June. An auction of 40-year JGBs went ahead as scheduled. Yields on the 10-year JGB climbed as much as three basis points while the futures trading halt was in force. The bonds extended losses after the lunch break.

“Because investors can’t sell futures before today’s auction, bonds are susceptible to selling for hedging,” said Makoto Suzuki, senior bond strategist at Okasan Securities Co., before trading was resumed.

The Tokyo exchange operator and the Osaka venue cited cost savings from integrating computer systems as a reason for merging when they announced the takeover bid on Nov. 22.

Tokyo, which hosts the world’s No. 2 cash equities bourse by the value of companies listed, stopped trading in 241 securities for 3½ hours on Feb. 2 after a server failure. That error, which also occurred during the height of earnings season, followed a Dec. 29 cable malfunction that slowed trading.

A TSE information technology planning document from last September made building and maintaining “a trading system of the highest global standard” a core priority for developing the company’s derivatives market.

“They need to build reliable infrastructure regardless of the cost,” said Goya Nakao, a senior investment manager at Sompo Japan Nipponkoa Asset Management Co.