Question

Japan’s government rebuked the Tokyo Stock Exchange and one of the country’s biggest brokerage firms Friday after a typing error caused Mizuho Securities Co. to lose at least 27 billion yen ($225 million) on a stock trade. The error roiled the Japanese market, while jitters over the reliability of the exchange’s trading system contributing to a 1.95 percent drop in the benchmark Nikkei 225 index Thursday. The Nikkei rebounded 1.45 percent Friday to finish at 15,404.05, but the mishap triggered concern among some traders just a month after an embarrassing glitch at the Tokyo exchange shut down the market for almost an entire day. The trouble began Thursday morning, when Mizuho Securities tried to sell 610,000 shares at 1 yen (less than a penny) apiece of a job recruiting firm called J-Com Co., which was having its public debut on the exchange. It had actually intended to sell 1 share at 610,000 yen ($5,041). Worse still, the number of shares in Mizuho’s order was 41 times the number of J-Com’s outstanding shares, but the Tokyo Stock Exchange processed the order anyway. Mizuho says it tried to cancel the order three times, but the exchange said it doesn’t cancel transactions even if they are executed on erroneous orders. By the end of the day, Mizuho Securities — a division of the nation’s second-largest bank, Mizuho Financial Group, Inc., had lost at least 27 billion yen ($225 million). That total could rise, however, Mizuho Securities spokesman Hideki Sakuma said Friday, adding that the mishap was sparked by human error. Japan’s Financial Services Agency, the country’s financial watchdog, began an immediate probe into what went wrong and how to prevent a repeat. “In order to maintain the credibility of the Tokyo Stock Exchange, I very strongly want this issue to be resolved quickly,” Economy and Banking Minister Kaoru Yosano told reporters Friday. “The first thing for the Financial Services Agency to do is to determine what happened in detail. Based on that, we will decide what is needed based on the rules and regulations.” “We need to think more about putting safety measures in place to prevent confusion,” Prime Minister Junichiro Koizumi told reporters Friday. Chief Cabinet Secretary Shinzo Abe said the Finance Ministry was working with Mizuho and the Tokyo Stock Exchange to formulate countermeasures for the future. J-Com’s shares debuted at 672,000 yen ($5,600) on the Tokyo exchange’s Mothers market and plunged to 572,000 yen ($4,767). But a big buy bid placed after Mizuho Securities’ sell order helped lift J-Com to 772,000 yen ($6,433) at the close. According to a Ministry of Finance filing, Morgan Stanley ended the session with a 31.2 percent stake in J-Com. The Tokyo Stock Exchange suspended trading of J-Com on Friday, but declined to specify how it will sort out a mess created by the botched order. But news reports have suggested the exchange may cancel the order through penalty payments, borne by Mizuho. Many of the sell orders have yet to be carried out, meaning further trading could “cause instability in the market,” the exchange’s managing director, Tomio Amano, said at a news conference. The botched trade comes at a sensitive time for the Tokyo exchange, which has surged on record volume, spurred by buying from foreign investors. For Mizuho Securities, the news is even worse. Mizuho Financial Group said it would fully back its security arm’s losses from erroneous trades of J-Com. But the red ink could wipe out Mizuho Securities’ profit of 28 billion yen ($233 million) for the fiscal first quarter that ended in March.

please discuss how the trading system in the Tokyo Stock Exchange could be revised to prevent such mistake and loss from happening in the future? (If you think it can not be prevented, why?) Please list your suggestions systematically, e.g. using 1,2,3, etc.

Answer 1

In this type of situation the total fault is of the Tokoyo Exchange and Mizuho Securities as they have executed the shares more than the outstanding shares which were available in the Market. This is a example of total communication faliure. If a company is listed in stock Market, than it gives all the basic details to the Stock exchange like how much shares of that company are free in the market that can be traded but here the traded shares is more than the 41 times the outstanding shares that were available in the stock market. This is a very embarassing Technical issue which is done Mainly from the side of Tokoyo Exchange and which lead to a huge loss To the Mizuho Securities. These type of issues can be easily solved if the exhange is little careful about it and Reject the shares if the share is more than the outstanding shares Available in the stock market.For this thing, we can made a proper Algorithm which rejects the order if the Ordered Quantity shares is greater than the outstanding shares than the Exchange(Tokoyo) should have reject the order. These type of Problems can be easily solved in Future if we have a Proper Algorhmic Trading System.