The blunder that halted trading in stocks for an entire day must not happen again.
The Financial Services Agency has launched an on-site inspection of the Tokyo Stock Exchange, which was hit by the failure of its trading system.
Prior to the inspection, the TSE submitted a report to the FSA, revealing the circumstances that led to the all-day suspension of trading on Oct. 1.
The FSA will examine the details of the report on-site. The agency said it will consider an administrative punishment such as a business improvement order in the future. The agency should deal with the matter strictly and take all possible actions, working with the TSE and the securities industry, to prevent a recurrence.
According to the TSE, the problem stemmed from the equipment that stores data on stock issues and customers malfunctioning, but the function that automatically switches to a backup machine was set to "off."
When the system was installed in 2010, it would switch to the backup machine after 15 seconds when a malfunction occurred, even if the switchover function was "off." However, due to a change in the specifications by the U.S. company that manufactured the machine, since 2015 the function has had to be "on" to switch over.
However, because Fujitsu Ltd., the supplier of the entire system, did not revise the handbook, the TSE was said to be unaware of the change and the switchover function remained in the "off" position.
It must be described as abnormal that the backup function was not working for such a long period as five years. Repeated testing under various conditions would have helped the TSE to understand the situation. Fujitsu's responses are also questionable.
In parallel with the FSA's inspection, the TSE's parent company will set up its own investigative committee made up of independent outside directors to reportedly investigate the cause and other matters. To prevent a recurrence, responsibility must be clarified.
One of the steps that could have been taken after the system failure was to manually reboot the system, which could have been restarted within the same day.
The reboot would have reset the orders already accepted by the TSE. When the TSE asked brokers if they could deal with the orders, many firms were said to be reluctant to do so because of the time and effort required to confirm with customers whether to cancel their orders or place them again.
Equipment has become more complex with the advance of ultra-high-speed trading. It is important to have crisis management measures in place that allow trading to continue in the event of a problem, while working to prevent failures from happening.
In order to do so, close cooperation between the TSE and securities companies will be essential. It is necessary to speed up the development of rules for the resumption of trading so that trading can be restored as quickly as possible in the event of a system failure.
Prime Minister Yoshihide Suga has put forward a plan to develop Japan as an international financial center by attracting top financial human resources from overseas. It is important to regain international confidence in the Japanese market quickly so as not to pour cold water on such a plan.
-- The original Japanese article appeared in The Yomiuri Shimbun on Oct. 24, 2020.
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