Japan Bond Trading Skids, TSE Looks for U.S. Bids

TOKYO—Trading in Japanese Government Bonds (JGBs) was disrupted last Thursday following a systems malfunction at the country's largest interdealer broker, Japan Bond Trading Co. (JBTC). JBTC was forced to suspend cash debt transactions for several hours while it investigated the error, which was rectified by the start of the afternoon session.

While market sources say that the material effect of the glitch is not significant—compared to recent technology failings at the Tokyo Stock Exchange (TSE)—observers note that there may be ramifications in terms of market confidence. Neil Katkov, group manager, Asia research at consultancy Celent, says that the credibility of the country's trading systems is likely to suffer further. "It suggests that capital market participants are not focused on rock-solid platforms," he says.

JBTC officials were unavailable for comment.

The TSE has suffered two high profile problems this year. In January, the exchange's clearing system struggled for capacity as a high-profile court case against Japanese media company Livedoor caused a rush of sell-orders that led the TSE to temporarily suspend trading (DWT, Jan. 23). Last month, the TSE suffered a fat-finger mistake when the TSE missed a trading error by Tachibana Securities, which caused the broker to sell shares at about one percent of their market value.

Last December, TSE president Takuo Tsurushima resigned following two IT breakdowns in six weeks.

Both the TSE and JBTC operate on systems from local vendor Fujitsu, a preference that is notable throughout the Japanese markets. "That's the way big systems are done, particularly for the banks, who have these suppliers as large corporate clients. It's not just about the politics, but they would be well advised to go for world-class suppliers," says Katkov.

Fujitsu officials decline to comment.

The failure of a Japanese institution could hardly have arrived at a worse time for the TSE, which has been subject to considerable speculation following press reports in Japan that it is planning a tie-up with the New York Stock Exchange (NYSE). Taizo Nishimuro, the TSE's president, reportedly told Nihon Keizai Shimbun, a Japanese newspaper, that he believed NYSE to be an important potential partner as his exchange moves toward an overhaul of its international strategy.

Confidence in its trading systems aside, Katkov says that the foremost barrier to any potential merger is the fact that the TSE is not listed. "The main driver among other exchanges is that they are listed, and they have a commitment to provide shareholder value through aggressive strategies. The TSE doesn't have that commitment," he says.

With new CIO Yoshinori Suzuki in place (DWT, Jan. 30), the exchange announced plans to install a new clearing system by 2009.

Katkov suggests that this could be with one eye on a future listing, although the selection of another local vendor, Hitachi, means that the exchange has a way to go before it can be seen to be modernizing. "A full corporate and operational merger, in terms of integrating the technical platforms of the TSE and NYSE is probably not what the TSE is thinking," he says. "It might help bring in some world-class systems and processes, but I doubt that's the reason they're considering it."

NYSE officials decline to comment. TSE officials were unavailable for comment by press time.