TOKYO -- One of the most vexing, yet important issues facing investors in Japanese equities is the daily trading limit rule.
Tokyo Stock Exchange
stops trading in a stock if the price hits its daily limit, a situation called limit-up or limit-down, depending on direction.
In serious situations, when orders for bids and offers don't balance, trading can be suspended for days. In December, that's what happened with shares of
Liquid Audio Japan
, the unit of
, that went public on the TSE's new high-growth
board. Buyers wanted the company's shares so badly, Liquid Audio didn't start trading until almost two weeks after listing.
Some say the rule, which doesn't exist in most major world markets, provides a much-needed break for traders to calm down when the pressure is on. Others are not so sure.
"The rule is insane since the TSE has different trading bans for different priced stocks. It makes absolutely no sense to have this rule," says the unopinionated Kazunori Jinnai, deputy general manager at
Daiwa SB Capital Markets
. "It just brews frustration on the trading floor and for the investors who can't get their hands on the stock."
The TSE has come under fire for hanging on to the rule, but is steadfast in keeping it, it says. However, the exchange may be forced to change as electronic trading platforms and new bourses pop up in Japan to challenge the old establishment.
, which aims to start trading in the fourth quarter of this year, said it is currently mulling the consequences of having such a daily trading limit.
"We definitely are thinking about a wider price range for the daily limits, but we also need investor protection," said John De Saix, vice president of business and planning at
Nasdaq Japan Planning
, at a recent press briefing.
Since Nasdaq Japan will first use the
Osaka Stock Exchange's
trading platform and settling system, it will likely adopt some form of trading limit. However, when Nasdaq in the U.S., Europe and Japan all hook up to provide investors with 24-hour trading, there's a good possibility the old trading limit on all Japanese bourses will be tossed out the window.