Tokyo Earmarks $27 Million for Hardware

In one of its first tangible investments to improve its tattered infrastructure, the Tokyo Stock Exchange (TSE) plans to spend more than JPY3.2 billion ($27.3 million) to upgrade its order-handling capacity by May.

"All of the money will be spent on hardware for the clearing and trading system," exchange spokesperson Mitsuo Miwa said last week. "We will increase the number of system storage units and CPUs [central processing units]." Trading and clearing system software will continue to be improved but will not need to be replaced in the immediate future, Miwa said. There will be no immediate move to replace the underlying trading system, supplied by Japanese computer giant Fujitsu, that had been blamed at least in part for a series of recent mishaps and outages.

In November, trading had to be suspended for three hours during a software upgrade. "We have devised a new operational procedure, and it has already solved the problem," Miwa said, adding that all software-related problems have been resolved. That also applies to the cause of the exchange's inability to cancel a trading error in December that cost Mizuho Securities $344 million. "IT engineers within the exchange and our outside vendors cooperated," said the spokesperson, adding that the only outstanding issues are hardware-related.

The most recent spate of problems, which caused an early shutdown of trading on Jan. 18 and a 30-minute delay in the opening of afternoon sessions ever since, had to do with capacity. On the day of the early closing, more than 7 million orders--accounting for about 4 million transactions--came too close to the maximum capacity of 4.5 million transactions.

"We will bring back the normal hours in May at the very latest," Miwa said. Processing capacity will increase from the current 9 million orders per day to 12 million, and then to 14 million by year-end.

Some observers still question TSE's software adequacy. The Osaka Stock Exchange (OSE)--which previously used the same Fujitsu trading system as Tokyo--recently decided to replace it with one from Hitachi (Securities Industry News, Feb. 20).

"I think most of the problem lies in software, and the biggest proportion of the money should be [spent] on it," said Neil Katkov, group manager of Asia research at Boston-based Celent. He believes TSE is paying a price for having tried to economize on software. "Their systems are not sufficient," he said. "They should focus on advanced software to be competitive with global peers." If allowed to fester, "the TSE's problems can potentially affect investors' ability to trade in Japan's capital markets and hurt investor confidence--not to mention Japan losing a lot of face."

According to TSE's Miwa, however, the existing Fujitsu system should be adequate for at least another two years as the exchange continues to update it. But the Tokyo market will consider all options when it comes time for the next-generation system. "We won't rule out any vendor, whether domestic or foreign, such as OMX," he said, referring to the Stockholm-based exchange operator and technology vendor that was believed to have been under consideration at the OSE.

Miwa said that TSE's newly appointed CIO, Yoshinori Suzuki, will head a team that will determine the appropriate system for the exchange over the next couple of months to two years. The JPY3.2 billion investment is seen as just a beginning. In March, a plan should be drafted that looks ahead to the next-generation platform, creation of a backup site and other improvements. Total IT investment is to double over the next three years, he said, to about 50 billion yen.

Wendy Yu contributed to this report.