Aug 15, 2012
Latest TSE glitch calls for financial penalties
Market participants have called for the Tokyo Stock Exchange
(TSE) to be financially accountable for trading glitches, in the wake of last
week’s outage that halted the bourse’s derivatives trading for over 90 minutes.
The outage hit a range of derivatives including Topix index
futures, Japanese government bond futures and options trading. “Market
participants are held to a high standard when trading so the exchange should be held to the same. Financial
penalties for outages would be a very motivating step to curtailing these
issues,” said Keith Ducker, CIO of TORA. Though he added that this would be
hard to implement.
The most
recent bug is understood to have hit during a moderately slow trading environment,
meaning most of those affected only suffered minimal losses. However, this is
not the first time in recent memory the TSE has had to halt trading, and
previous halts have been more impactful. In February it saw trading suspended
on over 240 shares for three-and-a-half hours on the back of a computer problem
– its biggest for several years.
“Inevitably,
there is damage to TSE as continual system issues erode confidence especially at a time when the exchange is
asking investors to back its merger,” said Ducker. “Lack of confidence in the
exchange translates to reduced confidence in the overall market but further it
forces investors to evaluate alternative means of trading such as proprietary
trading systems (PTSs).
Japan has
several such PTS, the main ones being SBI
Japannext and Chi-X Japan.
The TSE and
the Osaka Securities Exchange are merging in a bid for the Japanese market to
remain a competitive international powerhouse. In an emailed comment to
theTRADEnews.com, the TSE said that the derivatives system to be used after the
merger has not yet been decided, and that an announcement will be made in due
course. Ducker notes that whichever platform is chosen “should go through an
extensive audit by a legitimate third party given the number of incidents both
exchanges have seen over the past decade.”
Ducker says
that investors need to build in safeguards to better protect their algos
against system outages primarily by investing in smarter monitoring technology
and evaluating how to manage risk in alternative trading venues. He notes that
there may “on the margin”, be a slight downtick in activity for
high-frequency trading (HFT) as a result of the recent crash, but it is
unlikely to have a serious impact as “we think the HFT strategies in place
would remain so, as start-up costs are high, fixed cost investments and funds
would be inclined to continue to amortise that investment in spite of glitchy
exchange technology.”
The Japanese have been traditionally conservative about
employing HFT, though recently they have been showing signs of warming to the
strategy. Ducker likewise does not expect this adoption process to be
de-railed, saying: “If there is alpha capture in a strategy, investors will
simply build in safeguards to better protect their algos against a system
outage. Keep in mind that HFT shops are very adept at managing a changing
market place.”
Reporting by Harry Thompson