The recent chaos at the Tokyo Stock Exchange stemming from an erroneous sell order involving J-Com Co. stock underscored poor crisis management on the part of the bourse, a key component of Japan’s capitalist economic activities. The TSE needs to do its utmost to strengthen its computerized stock trading system so that it can regain public trust, which is now in tatters.
On Dec. 8, Mizuho Securities Co., a brokerage unit of Mizuho Financial Group Inc., offered a massive erroneous sell order for shares of J-Com, a manpower recruitment firm newly listed on the TSE’s Mothers market. A Mizuho employee placed an order to sell 610,000 J-Com shares for 1 yen each, instead of offering to sell one J-Com share for 610,000 yen.
Although a warning that the order was abnormal appeared on the computer screen, the employee continued the operation. After the TSE telephoned Mizuho to find out whether the order was correct, Mizuho noticed the mistake and tried several times to cancel the sell order. But the TSE’s computer system would not accept the cancellation request.
J-Com stock had fetched an initial price of 672,000 yen per share. Since the number of shares mistakenly offered by Mizuho was about 42 times the 14,500 outstanding J-Com shares, the shares plunged by their 100,000 yen daily limit to 572,000 yen. When Mizuho started buying back the shares, the price in turn went up to the limit high of 772,000 yen per share.
Because Mizuho had to buy back the shares at a price higher than the price at which it sold them, it incurred a loss of some 27 billion yen at this stage. The chaos made investors worry about the possible impact of the losses on the brokerage itself as well as on the market as a whole and triggered broad-based selling on the TSE. That pushed the 225-issue Nikkei average down by 301.30 points to 15,183.36, and the first-section Topix index down by 29.86 points to 1,568.73 points.
The Mizuho employee’s mistake was something that had been considered utterly inconceivable for a securities professional. Mizuho apologized for causing the trouble and initially appeared to accept sole responsibility for the mess. Immediately after the mishap, the TSE explained that Mizuho had failed to follow the correct procedure for canceling a wrong sell order. However, the situation changed Dec. 11 when the TSE admitted that a defect in its trading system had prevented Mizuho from canceling the order.
The problem is that, although Mizuho sent a request to cancel the 1 yen sell order, the TSE system would not accept it and instead presented a sell order for the limit low of 572,000 yen, at which a trade was made. Apparently the 1 yen selling price was so far below the daily-limit low that the TSE system automatically set the selling price at 572,000 yen. At issue is whether the TSE’s system can rectify an unusual situation caused by human error.
On Nov. 1, a failure in the TSE system forced the bourse to shut down morning trade for three hours. The TSE started examining the design of the program for its system. The J-Com stock fiasco struck while that examination was going on.
In the end, Mizuho bought back about 510,000 J-Com shares, although 96,236 shares theoretically remained in the hands of investors. Since these shares were more than six times the number of the outstanding J-Com shares and Mizuho was unable to deliver actual stock certificates to those investors, Japan Securities Clearing Corp. had Mizuho pay 912,000 yen in cash for each share to the investors. The price was based on an estimate of how the shares would have been priced if a proper sell order had been placed the morning of Dec. 8. The settlement put Mizuho’s total loss at around 40 billion yen.
It is thought that Mizuho’s loss would have been limited to several hundred million yen if the TSE system had immediately accepted Mizuho’s cancellation request. Because the TSE admitted to a defect in its system, it will have to shoulder part of Mizuho’s loss. It is a costly lesson for the TSE, whose president, Mr. Takuo Tsurushima, is expected to resign over the incident.
The story should not end here. Apart from settling the financial matter with Mizuho, the TSE needs to immediately re-examine and correct the design of its system. Because a large amount of money instantly changes hands in a stock market, a minor error can cause enormous problems. A system dealing with stock transactions should be designed so that it can cope with an unthinkable error — such as a sell order for 1 yen.
Designing and building a system capable of coping with every possible error will cost a lot. But TSE management should recognize that, if they begrudge the expense, irreparable harm to the nation’s financial market will result.
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