The head of the Tokyo Stock Exchange (TSE) said an insider trading case unveiled by authorities last week was a blow to the reputation of Japan's capital markets and called for tougher rules to combat the problem.
"For this to happen as Japan touts its reputation globally as a trustworthy market, a market in Asia with a 130-year history and a strong set of rules… it's a real shame," said Atsushi Saito, CEO of the exchange.
Last week Japan's securities market regulator recommended Chuo Mitsui Asset Trust and Banking be fined, saying one of its fund managers traded on a tip from a broker about a planned share offering by energy firm Inpex in 2010.
The penalty marked the first action taken by authorities since they launched a probe over a year ago into a series of stock offerings around which selling and volume patterns had raised suspicion the information had been leaked ahead of time. But the relatively small size of the fine, 50,000 yen (Dh2,208), and the lack of official sanction against the individuals involved has prompted criticism that Japan's rules lack the teeth to act as a real deterrent.
While Saito said he was wary of over-regulation, he noted that penalties tended to be much tougher in Europe and the US, where last year hedge fund manager Raj Rajaratnam was hit with nearly $160 million (Dh587 million) in fines and sentenced to 11 years in jail.
"In western markets if the crime is severe enough the punishment can include being banned from the financial industry for good," Saito said. Japan's Securities Exchange and Surveillance Commission has not named the brokerage involved in the Inpex case. However, sources with knowledge of the matter have said that an employee of Nomura Holdings, a lead underwriter on the Inpex offering, was the source of the leaked information.
Nomura has not commented on whether its employee was the source of the tip-off, only that it was cooperating with the investigation by the SESC.
Saito, himself a former Nomura executive, put his weight behind a rule recommended by a securities industry association that would require underwriters to disclose to the company carrying out the offering to whom they are allocating stock.
"The lack of disclosure is at the root of all securities-related incidents. If a wide range of people are given access to information and there is transparency, then we would rarely see such cases occurring," Saito said.
Saito also criticised securities companies for not more actively promoting the use of rights offerings as an alternative to straight share sale. Because rights issues give existing shareholders the right to buy into a new offering it can limit the downward pressure on a stock triggered by worries about dilution.
In theory that should limit the incentive for investors to try to profit by taking out short positions around the offering.
But for securities firms it can entail more risk because under one type of offering the underwriter must commit to subscribe to any stock not taken up by existing shareholders. This type of offering has not been used in Japan.
"The original intent of the job of underwriter was not to simply sell all the risk into the market and just profit from the commission," Saito said. "As underwriters they too need to be willing to take on risk."
The exchange also announced yesterday it would dissolve its joint venture in Japan with the London Stock Exchange and run the struggling market for professional investors on its own.
The two bourses launched the Tokyo AIM market in June 2009 with the aim of attracting start-up companies with less stringent listing and disclosure requirements than on the main Tokyo bourse.