Business

TSE studies simplifying minimum trade rules

by Taiga Uranaka

Distressed by a recent streak of huge erroneous orders, the Tokyo Stock Exchange has begun to study the possibility of streamlining the seven kinds of minimum trading units currently allowed for shares on the bourse.

But several obstacles lie ahead, including persuading issuing companies to agree to a potential jump in sharerelated paperwork.

Tokyo Stock Exchange Inc. President Taizo Nishimuro said this week that the bourse must review the wide variety of trading units it allows from the viewpoint of preventing order mistakes.

A minimum trading unit is the smallest block of shares of a firm that investors can sell and buy. Issuing companies can decide the size of the unit at their discretion. Currently, there are seven kinds of units at the TSE — 1, 10, 50, 100, 500, 1,000 and 3,000 shares.

While Livedoor Co. investors, for example, can buy or sell single shares at a time, the minimum investment in companies like Nippon Steel Corp. is in multiples of 1,000 shares, which is that firm’s minimum unit.

According to the TSE, 1,182 firms, or 50.9 percent of all companies listed on the bourse, have set their minimum trading unit at 1,000 shares. Those opting for a unit of 100 follows with 818 firms, including Toyota Motor Corp.

Because of this confusion, investors could run into trouble if they placed orders for the wrong units.

For example, JFE Holdings Inc., Nippon Steel’s rival, sets its minimum trading unit at 100. Nippon Steel shares finished Friday at 434 yen, while JFE shares were traded at 4,210 yen.

Even professionals get mixed up sometimes. In December, a broker at Mizuho Securities Co. mistakenly placed a sell order for 610,000 J-Com shares for 1 yen each, instead of the intended order to sell one share for 610,000 yen.

Last month, a Nikko Citigroup Ltd. employee, investing for private purposes, mistakenly placed a buy order for 2,000 shares of Nippon Paper Group Inc. instead of two.

The idea of streamlining trading units emerged as one way to possibly prevent such snafus from recurring, but TSE officials admit there are hurdles to clear.

First, if shares are traded in a single uniform unit above one, some stocks could become too expensive for individual investors. For example, Nippon Paper Group shares traded a little over 500,000 yen in Friday’s session. Not many individuals could afford that issue in multiples of 10 or 100 shares.

On the other hand, for companies using the 1,000 unit, dividing it into smaller blocks will increase paperwork, including issuing a greater number of stock certificates.

The practice of trading shares in various units instead of single shares was introduced in 1982, following a series of scandals involving “sokaiya” cooperate racketeers, who tried to extort funds from firms by threatening to disrupt shareholders’ meetings. Before that, investors could trade in single share units.

Vital to the racketeers’ operations was to become shareholders of their target companies, and they often bought only one share to get access to shareholder meetings.

The minimum trading unit system was put in place to make it more expensive, and therefore difficult, for such extortionists to prey upon many companies at once. Firms also elected to hold shareholder meetings on the same day also to keep sokaiya at bay.

The trading unit system has gone through various revisions since then, and today, issuing firm can decide the size of the unit from a single share.

In the case of Livedoor, founder Takafumi Horie said his firm was courting individual investors by making its shares affordable through setting the minimum trading unit at one share and conducting large-scale stock splits.

“(The units) are confusing for even professionals,” said Masaki Motomura, a strategist at Nomura Securities Co.’s financial and economic research center.

“The order mistakes would have not happened if there had been a single trading unit,” he said.

At the same time, he said it would take a while before single-unit trading is realized.

“There may be some listed companies that will instead point the finger at the TSE, saying it was the bourse’s computer system problem that aggravated the damage stemming from the mistaken (J-Com) order in the first place,” Motomura said.