Tokyo Trading Glitch Thaws Resistance to Alternative Platforms

Asian Stocks Head for Worst Month Since 2008
Asian stocks headed for the biggest monthly drop in more than three years and U.S. Treasury yields fell to a record low after Spanish credit default swaps surged amid signs Europe’s debt crisis threatens global demand. Photographer: Tomohiro Ohsumi/Bloomberg

The Tokyo Stock Exchange’s worst breakdown in six years has forced a rethink of the role alternative trading platforms play in ensuring that shares of some of the world’s biggest companies keep changing hands.

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

The policy was a response to complaints from investors who were unable to trade 241 companies including Sony Corp. and Hitachi Ltd. for 2-and-a-half hours while Tokyo scrambled to fix its computer system, according to Yamamoto. The association had no plan 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 yesterday said in a phone interview. “We decided that in the future they should keep running to allow trading even when there are system problems on the main venues.”

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, while they accounted for about 25 percent of the stocks that changed hands on England’s benchmark index.

5 Percent Rule

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 with more than 10 shareholders. No such regulation exists for shares bought on the main bourses.

The February glitch stemmed from a malfunction in a server that handled order information for about 15 percent of the shares on the 1,665-member Topix. The disruption meant investors couldn’t trade 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, according to data compiled by Bloomberg. Investors diverted orders to Japan’s second-largest bourse after the electronics maker a day earlier said it was replacing Chief Executive Officer Howard Stringer.

‘Continuity Plan’

Trading on Japan’s new platforms was halted by the broker’s association, which said that 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, marketing manager at SBI Japannext in Tokyo. “The glitch triggered a lot of constructive debate among the 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 new venues increased market share last year by the most since they started business in 2007.

Off-exchange trading has shown its worth on other days when individual stocks were unable to be bought and sold in Tokyo. Four times as many shares of Olympus Corp. traded away from the main bourse after a rush of sell orders forced Tokyo to cancel trading of the stock on Nov. 10, when the scandal-hit optics 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.”

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