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Broker Wrongly Reported $617 Billion in Orders, JSDA Says

Broker Wrongly Reported $617 Billion in Orders, JSDA Says

Trading screens across Tokyo showing $617 billion of over-the-counter stock transactions were the result of a reporting error by a broker, according to the Japan Securities Dealers Association.

A brokerage carried out a series of off-exchange trades yesterday, only to incorrectly report the size of the transactions to the JSDA, an official at the industry association said by phone today, asking not to be named in line with the body’s policies. The JSDA distributed the false reports to the wider market.

The unidentified broker completed the trades at 9:25 a.m. Tokyo time yesterday and sent the reports, which misstated value as volume, one minute later, according to a notice on JSDA’s website. The false reports were canceled at 9:43 a.m. and replaced with the real transactions in the afternoon.

Traders used to seeing 2 trillion yen ($18 billion) of equities changing hands a day on the main board of Tokyo’s bourse were dumbfounded to witness off-exchange crosses for shares worth almost 68 trillion yen -- greater than the size of Sweden’s economy and 16 times the Japanese over-the-counter market’s traded value for the entire month of August. The industry needs to develop measures to prevent such mistakes recurring, said Takashi Aoki, a Tokyo-based fund manager at Mizuho Asset Management Co.

“It’s bad for Japan’s image,” Aoki said by phone today. “It doesn’t have a direct impact on asset prices, but it has a negative impact in that it makes people more distrustful of the market.”

Inaccurate Reports

The Financial Services Agency, the market regulator, oversees all securities transactions including OTC trades. An official at the agency, who asked not to be named in line with internal policy, said the regulator can impose penalties for fraudulent reports of OTC trading. The FSA would not take action if the inaccurate reports were the result of an innocent error, the official said, adding that the regulator could not comment on individual cases.

Brokers have to report all off-exchange or OTC trades to the JSDA. If they make a mistake, they have to notify the body within five minutes of the error taking place, the official at the association said. The notice on the body’s website did not say when the broker revealed that it had made an error. The official declined to say how often such corrections occur.

Toyota Trade

The biggest of the false reports was for 1.96 billion shares in Toyota Motor Corp. -- 57 percent of the outstanding equity in the world’s biggest carmaker -- for 12.68 trillion yen. Toyota declined to comment yesterday. Other erroneous order reports concerned Honda Motor Co., Canon Inc., Sony Corp. and Nomura Holdings Inc.

JSDA data compiled by Bloomberg shows that someone traded 306,700 Toyota shares at 6,399 yen apiece at 9.25 a.m. yesterday. The total value of the transaction was 1.96 billion yen. The false report was for an order of 1.96 billion shares. JSDA said the broker accidentally put the value of the transaction in the field intended for the number of shares.

Mistakes occur periodically on the world’s electronic trading venues. In 2009, UBS AG accidentally ordered 3 trillion yen of convertible bonds issued by Capcom Co. In 2005, Mizuho Financial Group Inc.’s securities unit was unable to cancel a mistyped order for J-Com Co., costing the bank 27 billion yen.

About 4.15 trillion yen was traded off-exchange in August, according to the JSDA. That compares with about 41 trillion yen on the first section of the Tokyo Stock Exchange, where more than 1,800 of Japan’s largest companies trade.

JSDA is a self-regulatory organization for brokerages and financial institutions. The group’s regulatory functions include creating rules for its members and inspecting them. The association also compiles data from its members on off-exchange transactions, according to its website.

(Updates with comments from regulator in sixth paragraph.)