What's Going on at the Tokyo Stock Exchange

For those who haven't heard about the mistaken trade entered by Mizuho Securities last week that resulted in another embarrassing incident for the Tokyo Stock Exchange and now a $330 million loss for Mizuho, you better read this story by Martin Fackler (NY Times) covering the incident and more about the world's 2nd largest stock exchange. Ironically the huge mistake had little negative impact on trading of other stocks and market sentiment remained bullish until yesterday and today's big sell-off by those taking profits against a strengthening yen.

This article is the best one on the story I have come across. The latest updates to this story I have seen include word that the Tokyo Stock Exchange will help Mizuho in covering some of the losses although no amount was mentioned. The President of Mizuho stated publicly that his company has strong financials and will be able to absorb the loss without any adverse effects to the financial health of the firm. And Japan's Financial Services Minister Kaoru Yosano publicly criticized the opportunist mentality of a handful of brokerage firms that capitalized on the obvious error. Yesterday's print edition of the Wall Street Journal (C14, "Mizuho Settles Trade Debacle") listed the following brokers as having made handsome profits: UBS (UBS), Morgan Stanley(MWD), Nikko Cordial, Lehman Brothers (LEH), CSFB (CSR), and Nomura (NMR).

Full story follows.

December 13, 2005
Tokyo Exchange Struggles With Snarls in Electronics
By MARTIN FACKLER

TOKYO, Dec. 12 - What exactly is going on at the Tokyo Stock Exchange?

Last month, a computer glitch shut down trading on the exchange, the world's second-largest after the New York Stock Exchange, for almost an entire day. Then last week, a typographical error by the Mizuho Securities brokerage generated a $330 million loss. On Friday, the prime minister demanded corrective steps, and regulators began an investigation.

"I can't imagine problems like these happening at the New York Stock Exchange," said Neil Katkov, an analyst in Tokyo for Celent, a research firm based in Boston that specializes in financial technology. The Tokyo Stock Exchange, he said, "hasn't brought its procedures and technology up to the norms of international exchanges."

The latest electronic mix-up began last Thursday during the initial public offering of J-Com, a small recruiting company. An employee at Mizuho, a subsidiary of the Mizuho Financial Group, mistakenly typed an order to sell 610,000 shares at 1 yen, or less than a penny each, instead of an order to sell one share at 610,000 yen ($5,057) as intended, the brokerage said.

At that price, the sale would have been worth $3.1 billion, far more than the company's actual value. But the number of shares ostensibly being sold far exceeded the shares on offer.

Mizuho's computer failed to catch the error, but that wasn't all. As Mizuho tried frantically to cancel the order, the computer at the Tokyo Stock Exchange blocked its efforts for about 10 minutes, the exchange said. Mizuho finally managed to buy back most of the mistaken order before investors did.

But investors did buy about 100,000 of the nonexistent shares. Mizuho said Thursday that the typo would cost it 27 billion yen, or about $230 million, to reimburse buyers and cancel the order. But on Monday the stock exchange raised the total loss to 40 billion yen, or $330 million, ordering Mizuho to pay investors a premium of 300,000 yen, for a total payment of 910,000 yen for each share sold. The higher sum reflected an advisory group's calculation of where J-Com shares would have traded had the market not been flooded with the mistaken sell order.

But the exchange also said it would share the cost of the debacle with Mizuho. It was not clear, however, how much of the loss the exchange would assume.

In a hastily called news conference late Sunday evening, the exchange's president and chief executive, Takuo Tsurushima, admitted that a failure by the exchange's computer system was also at fault. Previously, the exchange had squarely blamed Mizuho, saying that the brokerage had not only botched the trade order but also had made an error as it tried to stop the order.

But Mr. Tsurushima also made reference to a glitch on Nov. 1 that froze trading on the Tokyo Stock Exchange for all but 90 minutes of an entire day, an unusual and embarrassing mishap for one of the world's top bourses.

"I feel a heavy responsibility for having caused turmoil in the market twice in such a short time," Mr. Tsurushima told reporters. He said he might resign, a customary gesture in Japan to take responsibility.

The investors will get cash instead of J-Com stock, the exchange said. Cash settlements have been used in the past to compensate investors when natural disasters disrupted trading, but are rare otherwise.

On Monday, Japan's Financial Services Agency ordered the Tokyo Stock Exchange to report on the cause of Thursday's failures. Japanese media reports said the agency may also order the exchange to completely revamp its computer system.

That computer system was designed by Fujitsu, the Japanese electronics company. Last month, Fujitsu said it cut the pay of its top executives as punishment for the company's role in the November failure.

Even Prime Minister Junichiro Koizumi commented on the problem. "We need to think more about putting safety measures in place to prevent confusion," he said Friday, according to the Associated Press.

The twin mishaps have raised concerns about the reliability of the Tokyo Stock Exchange's computer system at a time when a rebound in Japan's economy is bringing record trading volumes. Critics have castigated the exchange for failing to invest in modern computer systems or upgrade the system it has.

And some traders say the incidents point to a deeper underlying problem. They fault a bureaucratic culture of secrecy at the exchange that makes it reluctant to reveal details of its trading systems, even to brokerages. Some foreign trading firms have complained that the exchange does not respond to even routine inquiries about its systems.

Experts say other exchanges are far more transparent and rely on give-and-take with members to detect possible problems in the complex computer systems. They say the New York Stock Exchange routinely tests its computer system with big brokerages to avoid mishaps.

But Mr. Katkov, the Celent analyst, noted that Thursday's failure highlighted another problem: the inadequate computer systems used by Japanese financial companies. "An advanced electronic trading system should never have let this trade out of the gate," he said.

Source: The New York Times (newyorktimes.com)