Mon. Jan 18th, 2021

TOKYO — The Tokyo Stock Exchange, the backbone of Japan’s stock market, experienced a system failure on Thursday. This is the third time that the exchange’s “arrowhead” trading system, designed and developed by information technology services company Fujitsu, has experienced a critical failure.

Previous failures occurred in 2005 and 2012. Fujitsu had been generating good business results as it pursued its own digital transformation, but the most recent mishap could undermine its credibility and stall its progress.

“Why is this happening again and again?” an executive at Fujitsu said to himself on Thursday night. In 2005, a programming error by a systems engineer at Fujitsu led to the suspension of all stock trading on the TSE system. In 2012, a server failure in the distribution system for stock price information led to a major system failure. In that incident, a signal indicating the failure was not sent, so the system could not switch to a spare unit. That resulted in a partial suspension of trading. This time too, a memory device in Fujitsu’s off-site storage system Eternus malfunctioned.

The backup, which was supposed to take over automatically, did not work. It could be said that the company did not heed the lessons of the 2012 outage. Fujitsu, which had long been struggling with sluggish performance, sold its personal computer and smartphone businesses, setting the stage for structural reforms. Takahito Tokita, who took over as president in 2019, came to work wearing jeans as a part of his efforts to reform the corporate culture.

The company’s strategy of undertaking its own digital-transformation reforms and then selling them externally was beginning to work. The company’s operating profit for the fiscal year that ended March 2020 was 211.4 billion yen ($2 billion), up 60% from the previous period. It was the first time the company had broken the level of 200 billion yen in 12 years. The company said that it would be the leader in digital transformations as more Japanese companies pursued their own reforms amid the coronavirus pandemic.

Fujitsu expects to post a net profit of 160 billion yen for the fiscal year that ends March 2021, in line with the previous year despite the impact of the coronavirus. But just as its growth from digital transformation was picking up, the failure at the Tokyo Stock Exchange, a global financial center, cast a dark cloud over the company. There are a number of questions still to be answered about Thursday’s incident. “It is our responsibility to operate the market,” TSE President Koichiro Miyahara said at a news conference Thursday. He also indicated the exchange would not seek compensation from Fujitsu.

It seems the industry practice is that the party that orders a system takes primary responsibility for any problems that come up. However, an executive at Fujitsu said that lawsuits from shareholders and similar risks “cannot be ruled out.”

It is also noteworthy that the TSE continues to entrust its systems development to Fujitsu, though it has run into issues in the past. That decision is affected by the environment and practices around systems development. Stock exchange operations are highly specialized, and only a few companies develop systems for them.

Sticking with the same company could help maintain the system by using Fujitsu’s accumulated expertise to repeatedly improve and innovate.

However, it could also mean that there was never sufficient momentum for a broader rethink about the system.

There is also a focus on investigating why there have been repeated failures. With advances in digitalization, the TSE’s core system has become so large that it will be built using about 400 pieces of equipment such as servers. “Designing a system that doesn’t fail is fundamentally out of date,” said an engineer familiar with large-scale financial systems. That means it is important to assume equipment will fail and to plan for recoveries.

It was unusual for trading to be suspended for an entire day, as happened at the TSE. System failures occur in stock exchanges overseas, but trading often resumes on the same day in developed Western countries. They do not only focus on preventing failures, but rather create systems that assume failures will happen and minimize the impact. That kind of thinking is thought to be the main trend in the global information technology industry, especially among the four U.S. tech giants of Google, Apple, Facebook and Amazon.

It has been 15 years since the Fujitsu system’s 2005 failure at the TSE. The IT field has changed since then, with the U.S. quartet coming to dominate.

Many businesses and individuals have come to use cloud systems managed by Amazon and other companies. Alphabet, which owns Google, has over 15 years increased its market capitalization by 8.5 times to about $1 trillion, compared with Fujitsu’s increase of 1.9 times to about 2.91 trillion yen. Japanese IT companies like Fujitsu could not move away from simply selling servers and other equipment, and fell behind their U.S. competition.

“I want to see a companywide effort to address this, and not just leave it to separate departments,” Tokita on Thursday said he had told the Fujitsu vice presidents in charge of investigating the system failure. Tokita has a sense of urgency about the issue, having long worked as a systems engineer in finance and having been involved with the system at the TSE.

“I know firsthand how important, and how scary, systems can be,” Tokita said. His reforms are now facing their biggest challenge yet.

By Bureau