Mizuho Bank - Botched Trading Scandal of 2005

Botched Trading Scandal of 2005

On Thursday, December 8, 2005, shares of recruitment firm J-com debuted at 610,000 Japanese Yen (¥) ($5,041) on the Tokyo Stock Exchange (the TSE). An inexperienced trader at Mizuho, intending to sell one share at ¥610,000, instead sent an order at 9:27 am to the TSE to sell 610,000 shares of J-com at ¥1 each, essentially attempting to sell $3.075 billion worth of stock for only $5,041. In addition, the size of Mizuho's sell order was 41 times the total number of J-com shares. There were no controls in place at Mizuho to prevent such grossly erroneous trades from being sent to the TSE, and neither were there any controls at the TSE to prevent such trades from being executed, although the TSE has instituted some since then. At Mizuho, such controls could have included something as simple as a dialog box asking a trader if he was sure he wanted to sell more shares of a company's stock than actually existed. At the TSE, considering that there is almost no justifiable reason to place such a sell order, controls should have rejected any such order. The TSE did have the ability to halt trading that day, but did not exercise it. Tokyo stocks dropped 1.72% largely due to investor fears that the TSE could not maintain an orderly markets. Shares in J-com were halted the next day as the TSE attempted to untangle the mess caused by the gigantic, erroneous trade.

Despite the extremely large sell order, J-com's stock price dropped by no more than 15% from its opening price to its low, ¥572,000 ($4,767), due to a large bid supporting the market as well as numerous day-traders taking advantage of the market imbalance, and the stock closed higher at ¥772,000 ($6,430) per share. J-com itself was only able to sell 2,800 shares due to Mizuho's flooding of the market with 610,000 shares at a much lower price, with Mizuho selling shares at ¥1 versus J-com selling at ¥610,000. Supporting the price were buy orders placed by Mizuho in an effort to counteract the effect of their erroneous sell order and to minimize their losses, essentially attempting to buy shares from themselves before other market participants were able to. Buying up many of Mizuho's erroneously sold shares, competing brokerage firm Morgan Stanley acquired 31.2% of J-com by the end of that trading day. Mizuho's losses due to the erroneous trade that day wiped out the entire quarter's profits.

On the day the order was transmitted, Mizuho representatives made multiple requests to the TSE to cancel all portions of the order not yet executed. But the TSE responded that those orders still open but not completed would have to be settled in cash. The cash settlement of a stock order had never been used by the exchange in its 55 years of operation, but was required in this case. J-com's share price increased substantially from the day's low, when many of Mizuho's erroneously placed sales were purchased by other market participants. Since the number of shares offered for sale vastly exceeded the number of shares in existence, buyers of the stock could not be provided the stock they paid for. Mizuho could not provide those shares, because the shares did not exist, and so Mizuho had to honor those trades with cash payments representing the change in value of the shares since the transactions occurred.

The following day, all trading in J-com was suspended while the TSE worked to untangle the mess Mizuho's erroneous order created.

On December 4, 2009, the Tokyo District Court ruled on a lawsuit by Mizuho against the TSE seeking compensation for damages that were done when the TSE failed to cancel Mizuho's trade. The court determined Mizuho's total damages at ¥15 billion, as compared to the ¥41.5 billion Mizuho sought. The TSE was then ordered to pay damages to Mizuho to compensate for losses on the botched J-com trade. The judge placed 70% of the blame on TSE, citing the TSE's failure to halt trading as soon as the enormous, market-distorting sell order hit the market, and placed 30% on Mizuho, which should have had their own controls in place.