legal Issues of Stock trading in AI era Part3

In stock trading in the AI ​​era (part 2), I mentioned the amendment of the Financial Instruments and Exchange Act to respond to specific problems. Here, I will show you an interesting cases before mentioning the detailed content of amendment.

Hokuetsu Kishu Paper Company stock price manipulation case (February 16, 2011 decision).

Market manipulation is prohibited under theFIEA Article 159  section2  (1) .

It set out that

(2) No person shall commit any of the following acts for the purpose of inducing sales and purchase of Securities, Market Transactions of Derivatives or Over-the-Counter Transactions of Derivatives (hereinafter referred to “Sales and Purchase of Securities, etc.” in this Article):

Of course,it may be  an issue about “for the purpose of inducing sales and purchase of Securities” when using the algorithms.But it is the same even if it is a transaction using an algorithm.

You can see the detils of the transaction on the website of the Stock Exchange Oversight Committee (Recommendation).

Basically algoritms are as follows;
Selling order without intent to make a deal
Buy order
Change the limit price to a price which there is no possibility of deal
Change the limit price again near the best quatation value

However, as an interpretation theory, it seems that such “marbles” are being carried out on a daily basis, and if so, the requirement for incentive purposes of “inducing sales and purchase of Securities” It seems to be argued that it will not be satisfied.

In IOSCO’s report, in Recommendation 5, “Market authorities should be monitored for new forms or types of market impediments that technological development can bring, and appropriate measures should be taken if necessary”

Also, in response to the WG report, the amendment of Financial Instruments and Exchange Act was proposed and  passed the National Assembly.

Materials related to this amendment can be accessed from this page(Japanese).

In English,AMT Law Offices’ report may be useful.

The law itself is not only responsive to high-speed transactions, but also includes

(1) introduction of fair / disclosure rules,

(2) development of legislation concerning high-speed transactions (high-speed trading of stocks, HFT) of shares, etc.,

(3) flexibility of the scope of operations of the financial instruments exchange group And so on.

Outlines are set out in the AMT paper.

Specifically, Article 2, para. 41 after the revision of the same law set out

“High frequency trading means the actions as set forth in (i) through (iii) below where the decision making concerning such actions is determined automatically through an electronic information processing system, and the information necessary for the sale/purchase of securities or the market transactions of derivatives5 based on such decision is communicated through information technology to the financial instruments exchange or any other person specified by the Cabinet Office Ordinance, with the methods to be used in order to shorten the time usually required for such communication to be specified in the Cabinet Office Ordinance (except those specified by the Cabinet Order as actions which are considered harmless for the purpose of protection of investors, considering the details of such actions):

(i) Sale/purchase of securities or market transactions of derivatives;

(ii) Entrustment of the actions described in (i); and

(iii) In addition to (ii), actions related to those described in (i) which are specified in the Cabinet Order to be equivalent to those described in (i) and (ii).”

And a registration system for traders who conduct high-speed algorithmic transactions (high-speed trading actors, 42 paragraphs) is introduced (Article 66 ss 50).

Traders are required  to take

(1) measures relating to system development and risk management

(2) measures relating to information provision to the authorities, etc.

(3) other provisions .

(1) measures relating to system development and risk management

System development (Article 66 -55)

As measures related to risk management, Proper management and operation of trading system (57),

appropriate business management system ·

Secure of property basis (58),

establishment of representatives or agents in Japan (in case of foreign corporation)

 (2)  measures relating to information provision to the authorities,

 Report  to authorities about performing high-speed transactions  & transaction strategies.

Create and save transaction records (58)

Regulatory review / inspection / business improvement order etc by the authorities etc. (58, 60, 67)

(3) As other provisions

 Prohibition of brokerage commissioned by a securities company from those who do not register at high speed, etc. Investigation by exchanges for those who conduct high-speed transactions (Article 85-5)

When introducing the WG report,there is criticism that there is a hindrance to price formation focusing on the profitability (original corporate value) of companies from medium- to long-term  view in the stock market where the share of algorithmic high-speed trading accounts for a majority.

In stock trading, there are two methods of trading.The one is “fundamental trading” which focus the profitability  of the company.The other is “technical  trading” which focus on price fluctuations themselves. The popularity of “technical  trading” is  not a problem caused by AI technology because that  existed before algorithmic trading became popular.


Ikuo Takahashi will have a talk about legal chatbot in the AI symposium

Ikuo Takahashi will have a  talk about legal chatbot in the AI symposium.

The symposium,titled as “Does AI change legal practice?”,will be held as follows;
(In Japanese)

Date and time
Wednesday, November 29, 2017, 13: 00-16: 00

Location Bar Creole 2F Creo A

The theme “Artificial intelligence changes legal affairs?”

Program (planned)
1 Achievement point of current artificial intelligence technology
Japan Microsoft Corporation
Principal software development engineer
Daiyu Hatakeyama

2 Practical efficiency improvement by utilizing AI technology
Nippon Catalyst LIMITED
Michigan lawyer USA
Tracy Greenwood

3 Legal consultation support by chat bot
Lawyer Ikuo Takahashi

4 Impact of population intelligence on future practice
Director Mete Yazuji, LexisNexis Japan Co., Ltd.

5 Legal Issues of Legal Practice of Artificial Intelligence
Attorney Aya Saito
6 Panel Discussion

You can access the announcement by Japan Law Foundation.