By Yuka Nakao,
After a computer glitch that brought trading to a grinding halt for one full day last month exposed the Tokyo bourse's unpreparedness for contingencies, some experts say more investment in human resources will be key to strengthening its risk management capabilities.
Although a temporary suspension is not uncommon globally, shutting down for an entire session on Oct.1 was an embarrassment for the Tokyo Stock Exchange, which has been banking on information technology to give it a competitive edge.
"Tokyo is one of the three largest financial hubs in the world, but it lacks human resources and systems to match that position," said Koetsu Aizawa, a professor of international finance at Saitama Gakuen University.
Around 3 trillion yen ($29 billion) is traded daily on the TSE, with roughly 3,700 listed companies. The bourse, which received an operational improvement order from the country's financial watchdog on Monday, is the third-largest in the world by market capitalization behind the New York Stock Exchange and the Nasdaq Stock Market in the United States.
With trading becoming more technical and systematic, glitches are bound to happen. As part of countermeasures, Japan Exchange Group Inc., owner of the bourse, has taken steps such as regularly renewing trading infrastructure. It also recently built a second backup center in western Japan in case of disruptions caused by major disasters.
But the TSE has admitted its procedures for resuming trading were inadequate as it had not taken into account a glitch that would require a total system reboot, as was the case with the latest shutdown, the worst in its history.
The fundamental cause of the disruption was a setting mistake due to an outdated manual provided by Fujitsu Ltd., which developed its trading system. Nonetheless, the TSE has reiterated that it was ultimately responsible for the outage as a market operator.
It is important not only to update technical specifications but also to enhance emergency responses, including prompt investigation and information disclosure in both Japanese and English, Aizawa said.
"Considering the risk of paying a huge amount of compensation after such an outage, it is worth having top-notch risk management experts, although they are expensive to hire," he said.
One of the obstacles to investing more in those experts is a Japanese business culture of not paying more to employees than company executives, he said.
Tetsuya Sakashita, an expert on data protection and a managing director at Jipdec, described the outage as an "incident that shook our social foundation to its core," at a time when the Japanese government is pushing for further digitalization.
"The shutdown showed the area where the TSE lacked preparations," he said. "It needs to reconsider how to allocate budget and human resources to step up measures against its shortcomings."
The fiasco with the bourse came as Tokyo has slipped one position to fourth in the ranking of the world's leading financial hubs, with Shanghai now rising to third place after New York and London, according to a report released by British and Chinese think tanks in September.
Prime Minister Yoshihide Suga has aimed to turn Japan into Asia's premier financial center, while Hong Kong's status as a hub for global finance has faced headwinds amid concern over the territory's semi-autonomy following China's imposition of a national security law this summer.
Although Hong Kong ranked fifth, it outperformed Tokyo in some areas of competitiveness, including business environment and human capital, according to the report by the Z/Yen Group and the China Development Institute.
"Unless the TSE develops a thorough risk management framework, it will be abandoned by the world," Aizawa said.
The reason the bourse decided not to reboot the system was to avoid confusion among brokerages as not all of them were deemed capable of quickly dealing with unexpected canceled orders and providing explanations to their clients.
A panel of professionals, set up following the shutdown, hopes to create new rules by March on quickly resuming trading.
London and New York stock exchanges, which both have rules to clear orders amid a system glitch, suspended trading in 2011 and 2015, respectively, but restarted after several hours.
Kenji Watanabe, a risk management professor at the Nagoya Institute of Technology, said that preventing a full-day outage cannot be sought out only by the bourse with about 400 employees.
"The Financial Services Agency should not just demand reports of the cause from the TSE and impose a (business improvement) order on the bourse. The public and private sectors should cooperate and hold drills (under various scenarios to resume trading) with those involved," Watanabe said.
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