US BROKERS DEFY TOKYO LIMIT REQUEST FUTURES MARKET FEUD BREWING

US BROKERS DEFY TOKYO LIMIT REQUEST FUTURES MARKET FEUD BREWING

Traders in the Japanese futures market, both domestic and foreign, see a feud brewing between the Tokyo Stock Exchange and U.S. brokerages over a request to limit trading of stocks for index arbitrage to session openings.

U.S. brokerage traders defied the request and sold stocks in order to unwind arbitrage positions throughout Tuesday's morning session, according to numerous futures traders.''The American brokers are going to have some answering to do to the authorities . . . because they ignored the request and upset everybody," said a futures trader at a foreign brokerage.

He added that the Japanese brokerages clearly honored the request, keeping their unwinding to the start of the afternoon session.

The TSE said Monday it had reviewed the recent market turmoil and concluded that unwinding of arbitrage positions - the buying of futures contracts and simultaneous selling of stocks included in the underlying index - was a contributing factor.

The exchange said it had decided to "request" that foreign brokers desist from unwinding except at the beginning of morning and afternoon sessions. No formal rule change was made, the exchange said.

The request was designed to concentrate such selling orders at a time when there are enough bids and offers outstanding to absorb any new order flow without affecting prices. The same amount of unwinding would have a lesser effect amid the plentiful bids and offers put in at session openings than later in the sessions when trading is thin, a TSE spokesman said. He added that the request was only meant to be temporary.

The request was not well-received by futures dealers, either foreign or Japanese.

Salomon Brothers, in a statement issued to the press, said that the request was misguided.

"We understand the TSE's concerns about the recent decline in the market. However, the action taken yesterday (Monday) may do more harm than good," the statement said.

"Changing the rules mid-stream is always a risky enterprise, exposing participants to uncontrollable risk and inviting calls of unfair treatment," Salomon said.

It added that it was less than happy with the way the move was announced: ". . . It doesn't help if the members (or at least the foreign members) are not consulted and first learn of these changes on the screens." The firm apparently learned of the TSE's decisions from news reports.

Futures traders said that two of the most active arbitrageurs met with TSE officials late Tuesday to discuss the rules.

"I'm sure the discussion was a little caustic," said one futures trader who had gotten wind of the meeting, but not of the results.

''I'd be angry too if I were the TSE," said another trader.

An official at the TSE said that because the unwinding Tuesday took place as the market was rising, "It doesn't seem that the intent is being violated."

But futures traders keeping tabs of which firms are selling baskets of stocks each day said that there were a number of instances of selling by foreign houses for unwinding of arbitrage after 9:30 a.m. JST.

Tuesday the market hit a peak at about 9:25 a.m. JST, and plunged over 1,200 yen over the remainder of the morning session. Several traders cited instances of selling after 10 a.m. JST, as the market was falling rapidly.