Why couldn't a stock trading system glitch at the Tokyo Stock Exchange be prevented? The TSE and the securities industry need to thoroughly determine the cause.
The TSE submitted to the Financial Services Agency a report regarding the system glitch that occurred on Oct. 9.
Of about 90 brokerage firms that use the channels connecting them with the exchange's trading system, about 40 firms became unable to trade orders in some issues. About 100,000 orders could not be executed.
The trading system is an important foundation that underpins Japan's capital market. The monthly trading value reaches a scale between 60 trillion yen and 70 trillion yen. The TSE should do everything it can to prevent a recurrence of a similar incident so that the function of the market will not be disrupted.
The trouble was triggered by communication messages that were erroneously sent to the exchange through Merrill Lynch Japan Securities Co. shortly after 7:30 a.m. on Oct. 9.
Due to heavy loads of data, more than 1,000 times the ordinary level, one of four channels connecting brokerage firms with the exchange went down. The TSE asked brokerage firms to switch their trading system to the remaining three lines, but numerous brokerages were unable to complete the necessary work by the time trading started at 9 a.m.
The exchange had beefed up its trading system, for instance, by setting it up not to accept extraordinary trading orders. But data that are not trading orders -- as were sent in this incident -- were not covered by this configuration. It was nothing but a weak point that had been overlooked.
Improve notice to investors
It is obvious that Merrill Lynch is greatly to blame. But in light of the fact that nearly half of the brokerage firms were unable to execute their trades, the TSE, as a market operator, cannot avoid taking responsibility, either.
The securities firms that were unable to smoothly switch lines should, for their part, investigate whether there was a problem with their own preparedness and response.
The TSE will modify the system's programs in a bid to prevent such an incident from recurring. It will also jointly conduct a drill with brokerage firms to deal with such an incident in which some of the lines in the system go down.
There were also cases of the TSE and the brokerage industry laying the blame on each other over loss compensation for customers whose trades were not executed. Although the ultimate amount of the losses is expected to be small, there is concern that if an incident causing sizable losses occurs, it will develop into a serious conflict between them.
There was also the issue of how to let investors know about the latest incident. More than a few investors were not aware of the unusual development, even after 9 a.m. Improvements are called for in this regard.
Thanks to the advent of super-fast trading that makes full use of computers, trades that are executed in a matter of one one-thousandth of a second have been spreading. As a result, the data loads on the trading system have further increased.
A system glitch can happen anytime. It is important for the officials concerned to be aware of such risks and prepare for them.
(From The Yomiuri Shimbun, Oct. 29, 2018)
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