The Tokyo Stock Exchange (hereinafter, the "TSE") has imposed disciplinary action (Imposition of a JPY 20 million fine) against Toyo Securities Co., Ltd. (hereinafter, the "Company") pursuant to Rule 34, Paragraph 1, Item 8 of the Trading Participant Regulations.
Additionally, the TSE has requested the submission of a business improvement report pursuant to the provisions of Rule 19 of the Trading Participant Regulations. The business improvement report shall include:
- Planning of improvement measures for the reestablishment of internal management systems and frameworks, including trading supervision conditions, and the actual implementation of such measures in order to prevent unfair trading, based on the causes of this violation of laws, rules, and regulations.
- Implementing training, etc. of all officers and employees in order to foster the proper understanding and compliance with law, rules, and regulations and in-company handling related to the prevention of unfair trading.
- Clarification of the locus of responsibility based on this disciplinary action.
Outline of Violation
1. Acceptance of Transactions to Create Artificial Market Conditions
(1) On December 18, 2008, the sales director of the Osaka branch of the Company proposed that Customer A to conduct cross trades for the purpose of profit, using margin positions for shares of Company X which is to be listed on the First Section of the TSE (hereinafter, the "issue in question"), and to use the profit realized from such transactions to liquidate margin positions of another issue. At that time, in order to execute Customer A's order at a more beneficial price, such sales director accepted and executed orders to pull up the issue in question's price with the goal of executing the order at the upper price limit.
(2) On December 25 of the same year, such sales director accepted orders with the intent of conducting cross-transactions and new additional margin transactions for switching positions in order to secure profit and unify the settlement deadlines of multiple margin transactions for the issue in question which Customer A held and for which the settlement date was approaching. Then, before the start of the morning session on the 26th, a special bid quote was displayed for the issue in question due to the placement of an amount of bids in great excess of the amount of offers (an "imbalanced cross transaction") over a period of time. While such special bid quote was being renewed multiple times, such sales director accepted and executed offers for the issue in question from a separate Customer B. As a result the issue in question's opening price was determined at the special bid quote which was being displayed at such time.
(3) Such sales director accepted and executed orders for the issue in question with sufficient awareness that the stock price was being pulled up by the type of the transactions above, and similar situations were acknowledged on June 11th, 12th, 20th, and July 11th of the same year.
(4) The above actions committed by the Company are deemed to fall under "Actions of acceptance, etc. of bids or offers for a listed financial instrument, etc., while knowing that such intentional actions do not reflect actual market conditions" as prescribed in Article 117, Paragraph 1, Item 20 of the Cabinet Office Ordinance on Financial Instruments Business, under Article 38, Item 6 of the Financial Instruments and Exchange Act.
2. Insufficient Trading Supervision for the Prevention of Unfair Trading
(1) While the Company had established in-company rules related to cross orders, because such rules were prepared with respect to cash transactions, the Company's trading surveillance division did not view margin trading particularly as a case for unfair trading though the trading in such case was flagged in the division, and as such, margin trading was excluded from the scrutiny of trading surveillance. Due to this, the cross orders, etc. accepted and executed for the customer by such sales director were overlooked.
(2) Additionally, the following was acknowledged with regard to the Osaka branch office:
- Front checks conducted by the branch office manager, the manager of general affairs, etc. were inadequate.
- The violations of in-company rules committed by such sales director were tolerated by the branch office manager, etc.
- It was acknowledged that the branch office manager was incorrectly overseeing the attention system, and that the action in the above 1 was caused by insufficiencies in the system related to this type of trading supervision, etc.
(3) The trading surveillance situation in the above (1) is in violation of Rule 4, Item 3 of the "Regulations for Trading Supervision Systems at Trading Participants to Prevent Unfair Trading" of the TSE. Additionally, based on the situation provided in the above (2), the Company's supervision systems and frameworks are deemed to fall under "a situation deemed insufficient in trading supervision for the prevention of actions of acceptance, etc. of bids or offers for a listed financial instrument, etc., while knowing that such intentional actions do not reflect actual market conditions" as prescribed in Article 123, Item 12 of the Cabinet Office Ordinance on Financial Instruments Business (pre-implementation of June 1, 2009) under Article 40, Item 2 of the Financial Instruments and Exchange Act.