OSE, TSE take disciplinary action against Mitsubishi UFJ Morgan Stanley Securities over spoofing

Maria Nikolova

OSE has imposed a JPY 40 million fine on the company and has ordered suspension of trading of government bond futures on the company’s proprietary account by its department handling trades in financial markets.

Osaka Exchange, Inc. (OSE) and Tokyo Stock Exchange, Inc. (TSE) today announce they have taken disciplinary action against Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.. over a practice known as spoofing.

During market surveillance of the OSE market, Japan Exchange Regulation (JPX-R) had detected activity suspected to be a form of market manipulation known as spoofing with respect to proprietary trading of Japanese government bond futures by the company, an OSE Trading Participant, and explained the details of the situation to the company in November 2017. Thereafter, JPX-R analyzed such proprietary trading in detail and reported the result of the investigation to the Securities and Exchange Surveillance Commission (SESC).

The SESC investigated the case in detail, and then concluded that such proprietary trading falls under market manipulation that is prohibited by the Financial Instruments and Exchange Act. On June 29, 2018, the SESC recommended to the Financial Services Agency (FSA) to issue an Administrative Monetary Penalty Payment Order against the Company. The FSA ordered the company to pay an administrative monetary penalty of JPY 218.37 million.

In the course of making successful bids for Japanese government bonds (JGB) in the primary market and then selling them on to its customers, the company trades JGB futures on its proprietary account mainly for the purpose of hedging the risk of changes in the prices of its holdings of JGBs. The rates trading section in the department handling for trading in financial markets is in charge of such transactions.

On August 25, 2017, with respect to September 2017 contracts of 10-year JGB futures traded at OSE, a government bond dealer in the section devised a way to adjust positions at advantageous prices. With the aim of inducing orders from other investors, the dealer conducted trades and placed orders on the company’s proprietary account in order to mislead other investors into believing that trading of the contract was thriving, which would artificially move the price of the contract favorably.

In particular, the investigation has found that, on August 25, 2017, the dealer repeatedly conducted the following acts between 6:34 p.m. and 7:09 p.m. during the night session, when liquidity is relatively lower than in the day sessions.

(1) Selling at higher prices resulting from spoof buy orders

  • The dealer placed large buy orders at prices ranging from the best bid price to approximately five ticks lower with no intention of executing them (spoof buy orders for a total of 6,253 contracts).
  • The spoof buy orders led other investors to place buy orders at higher prices, and the dealer placed proprietary sell orders to match them. These sell orders were executed (total 177 contracts).
  • The dealer cancelled the spoof buy orders a few seconds later.

(2) Buying at lower prices resulting from spoof sell orders

  • The dealer placed large sell orders at prices ranging from the best offer price to approximately three ticks higher with no intention of executing them (spoof sell orders for a total of 1,844 contracts).
  • The spoof sell orders led other investors to place sell orders at lower prices, and the dealer placed proprietary buy orders to match them. These buy orders were executed (total 158 contracts).
  • The dealer cancelled the spoof sell orders a few seconds later.

OSE and TSE explain that the above acts are deemed to fall under the act prohibited by Article 159, Paragraph 2, Item 1 of the Financial Instruments and Exchange Act (market manipulation).

As a result, OSE has decided to impose a JPY 40 million fine on the company and to suspend trading of government bond futures and options on government bond futures on the company’s proprietary account by its department handling trades in financial markets (excluding trades approved by OSE on a case-by-case basis, such as those required to fulfill outstanding contract obligations) during the period from October 9 to October 11, 2018

TSE is censuring the company.

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