Tokyo Stock Exchange imposes JPY 20m fine on Interactive Brokers Securities Japan

Tokyo Stock Exchange, Inc. has taken disciplinary measures against Interactive Brokers Securities Japan, Inc., following an inspection conducted by Japan Exchange Regulation (JPX-R).

The inspection has identified insufficient trading management to prevent acceptance of orders that could potentially lead to the creation of manipulative quotations.

According to an official report, TSE has imposed a JPY 20 million (USD 175,992/EUR 164,042) fine against the broker in line with the provisions of Rule 34, Paragraph 1 of the Trading Participant Regulations. The company is also required to submit a business improvement report pursuant to the provisions of Rule 19, Paragraph 1, of the same regulations.

Details of the Violation

Trading management to prevent unfair trading is conducted only by the Head of Compliance at the company. As per the broker’s request, its parent company in the United States, IBGLLC, identifies issues and customers for trading surveillance via the use of the Surveillance Report Generation System (SRG system), and the Head of Compliance receives such identified data.

However, during the period from March 1, 2010 to July 7, 2015:

• issue codes for TSE listed companies were duplicated by mistake on the company’s system, and the Company calculated each trading volume for two different issues instead of one;

• subsequently, it produced trading volume without separating sell and buy order executions on the system and added them together.

Also, the Head of Compliance checked data identified with the SRG system every morning in a very formal way, neglecting almost all cases, assuming that no measures were necessary.

Moreover, since August 20, 2014, the broker has not kept any records of two cases out of 13 where the JPX-R Market Surveillance & Compliance Department provided explanations to the company on actual conditions, because trading might lead to violations concerning forms of order and execution from specific entrustors. The Company did not have detailed knowledge of the trading nor made any analysis on forms of trading for the eight cases, and, concerning the other three cases, the broker also did not identify nor analyze the transactions for which JPX-R had given explanations.

The results from the identification that the Company conducted later show that 3,667 cases of 625 issues in total were identified as trading that could probably be spoofing made via IBGLLC in the United States. by non-resident customers on 62 business days from May to July 2015.

JPX-R verified the transactions for July 16 due to many transactions having been identified as cases that were likely to be spoofing, and deemed that 88 cases of 24 issues were traded in the form of spoofing and the like, where cancelling of large orders had taken place immediately after order placement.

The report also notes that Interactive Brokers Securities Japan has increased acceptance of orders of Japanese stocks from non-resident customers via group companies, which demands attention in terms of trading management. The company is provided with services by IBGLLC that include system development and trading management operations. However, the representative director of the Japanese broker did not provide sufficient training on operations of trading management to the Head of Compliance who had taken over said responsibilities. The representative director only reported to IBGLLC about customers in question without checking the process of the broker’s trading management operations nor knowing the problems.