Rapid jump in ‘net trading seen behind Tokyo’s woes

A rapid increase in the number of people buying and selling stocks online in Japan is a contributing factor to the Tokyo Stock Exchange’s admission that it is having difficulty keeping up with market volumes, analysts said.

The market, one of the world’s largest stock exchanges, closed for business 20 minutes early on Wednesday as a precaution against a system failure as the number of trades approached the computer’s daily limit. It began operating a shortened trading day from Thursday to further guard against possible problems.

While several causes for Wednesday’s problems were fingered, a key culprit appears to be the surging popularity of online trading in Japan, say some analysts.

The number of people accessing online trading Web sites in Japan from home shot up from 2.9 million in November 2004 to 4.2 million in November 2005, according to figures from NetRatings Japan. The number of page views on such Web sites also climbed fast, from 731 million to 1.6 billion in the respective months, the Internet market research company said.

The number of online traders began to rise fast in the middle of 2005, said Masahiko Ishibashi, a research director in Gartner Research Japan. At about that time speculation was building that Japan was finally coming out of an economic slump and the stock market began rising. The prospect of a rising stock market brought people into the trading game, he said.

It’s not just extra traders entering the market but also the way they are trading, said Ishibashi. These investors are buying and selling stocks multiple times each day to make quick profits on small price movements, he said.

Such day trading is hitting the stock exchange system hard because it’s daily limit is determined by the number of executed trades, not by the number of shares that change hands. At present the system capacity is 4.5 million trades per day and so market executives decided to end trading Wednesday when the number of trades hit 4.15 million. On Thursday, in a session that was 30 minutes shorter than normal, about 4 million trades had been handled by the close, according to Tokyo Stock Exchange.

In addition, investors were spooked this week by a raid by public prosecutors on Livedoor, a Japanese Internet portal. The company was raided on suspicion of wrongdoing in relation to an acquisition, according to local media reports, and newspapers have followed with additional accusations against the company over the last few days.

That led to a massive number of sell orders for Livedoor stock and Internet stock in general that pushed the system to capacity.

Looking ahead, the number of traders is likely to continue increasing, said Gartner’s Ishibashi.

The exchange had already planned to raise this to 5 million at the end of January and is now considering adding capacity to take the executed transactions limit to either 7 million or 8 million per day.