Japan Exchange Regulation (hereinafter "JPX-R") and Japan Securities Dealers Association have inspected kabu.com Securities Co.,Ltd. (hereinafter "the Company") and deemed that there was insufficient trading management to prevent acceptance of orders, etc., which could potentially result in the creation of manipulative quotations.
Tokyo Stock Exchange, Inc. (hereinafter "TSE") has taken disciplinary action (imposition of a JPY 10 million fine) against the Company pursuant to the provisions of Rule 34, Paragraph 1 of the Trading Participant Regulations and requested the Company to submit a business improvement report pursuant to the provisions of Rule 19, Paragraph 1 of the same Regulations.
Outline of Violation
○ Insufficient trading management to prevent acceptance of orders, etc., which could potentially result in the creation of manipulative quotations
(1) Identification of unfair trading by the Company
The Compliance & Risk Management Department of the Company (formerly, market surveillance division; hereinafter the "market surveillance division") (i) identifies transactions according to identification criteria specified by TSE’s Rules concerning Trading Supervision Systems at Trading Participants to Prevent Unfair Trading (hereinafter the "Rules concerning Trading Supervision") and checks them, and then (ii) conducts trading surveillance on transactions that fall under the surveillance criteria specified by the Company.
The Company identified transactions and conducted trading surveillance as aforementioned in (i) and (ii), but when it introduced the Market Transaction Surveillance system (hereinafter "MTS") on April 13, 2012, then deputy general manager of the Compliance & Risk Management Department and manager of the market surveillance division (hereinafter "deputy general manager of Compliance & Risk Management") approved that the system specifications did not produce identification results of (i) but produced only transactions that fell under the surveillance criteria of (ii). As a result, the identification of customers for market surveillance became limited to a greater extent and not properly conducted.
(2) Trading surveillance by the Company
The market surveillance division of the Company consists of six people, including the deputy general manager of Compliance & Risk Management. The division conducts trading surveillance every day by using data identified by MTS and divides surveillance tasks among its members.
For cases in which the person in charge determines that a measure, such as sending a warning reminder, is needed as a result of the surveillance, the deputy general manager of Compliance & Risk Management Department judges whether such measures are appropriate and responds by implementing necessary actions. However, cases in which the person in charge determines that no measure, including sending a warning reminder, is necessary are not further examined.
The then executive vice president, who was the Internal Administration Supervisor managing the market surveillance division, along with the then General Manager of the Compliance & Risk Management Department received a weekly report via e-mail that informed them of market surveillance conditions. However, said report only indicated such information as the number of warnings; restricted trading accounts; and cases where the JPX-R Market Surveillance & Compliance Department gave explanations to the Company on actual conditions, because trading might lead to violations concerning forms of order and execution from specific entrustors. It did not describe details of each case for which market surveillance was conducted. As a result, the executive vice president and General Manager did not gain full knowledge of market surveillance conditions.
Therefore, the trading surveillance the Company conducted was deemed as inappropriate, because the Company did not check customers' trading motive or analyses of the impact on share prices and did not investigate cases in terms of repetitiveness and continuity, resulting in its concluding that there were no problems.
In addition, during the period from August 2015 to March 2016, the JPX-R Market Surveillance & Compliance Department gave explanations to the Company on actual conditions pertaining to the trading of equities, etc. for which the Company accepted orders from customers via the Internet. Among these, when JPX-R checked the Company's response about 17 cases in which trading was conducted only by the Company, JPX-R deemed that the Company did not conduct appropriate surveillance, even though the JPX-R Market Surveillance & Compliance Department had provided explanations to the Company on actual conditions. It was deemed that the Company either easily assumed that no measures were necessary in those cases or implemented lesser measures while failing to take effective measures to prevent unfair trading. Consequently, the Company was deemed to have continued placing unfair trading orders.
(3) The Company's internal management system
Given that the management of the Company and the General Manager of the Compliance & Risk Management Department lacked expertise on and experience in trading management operations, they decided to hire a deputy general manager of Compliance & Risk Management who did have such experience in his previous post at another company. In this way, they attempted to build a trading management system. However, they delegated all tasks related to operations to the deputy general manager without gaining any knowledge of those operations and without conducting substantial management or noticing the deficiencies. The deputy general manager of Compliance & Risk Management also did not fully check the results that came from persons in charge of market surveillance and did not appropriately manage day-to-day market surveillance operations.
Furthermore, the internal audit, which is supposed to identify deficiencies or problems in operations, confirmed that there were no problems with identification criteria for the market surveillance system but failed to realize that transactions that met the criteria had not been identified by the system. As a result, the management did not have a chance to notice the onset of the deficiencies.
The deficiencies in the Company, which were deemed so in (1) and (2), have breached Rule 4, Items 1, 3, and 4 of TSE's Rules concerning Trading Supervision, and the Company's trading management falls under cases in which "the trading management is deemed to not be sufficiently established for prevention of making an entrustment, etc. for a sale or purchase pertaining to listed financial instruments, etc., which may result in the formation of a manipulative quotation not reflecting actual market status" as prescribed for the business, etc. of a Financial Services Provider in accordance with Article 40, Item 2 of the Financial Instruments and Exchange Act.
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