Day Traders Take Control of Japanese Stock Market Using 300% Leverage; What Can Possibly Go Wrong?

High-Frequency-Trading (HFT) Algorithmic Programs dominate the equity markets in the US with as much as 80% of the volume in some markets.

Day Trading With 300% Leverage

It's different in Japan. In what seems like a flashback to dot-com trading in the US in 1999, Abenomics Spurs Day Traders as Japan Stock Volatility Hits 2-Year High.

Sitting before a cluster of computer screens in an apartment with the drapes shut, it took Naoki Murakami seconds to make $3,500 betting $1 million that Tokyo Electric Power Co. (9501) shares would fall a fraction of a percent.

Day trading helps explain why Japanese individuals now account for more than 40 percent of the nation’s equity volume, or about as much as the overseas institutions that once were the biggest traders. They’ve also helped make Japan the most volatile developed market.

Dramatic price movements aren’t the only thing that’s made Japan a day trader’s paradise. Deregulation of margin trading opened the flood gates, Murakami said. After rules were relaxed in January, investors can borrow three times as much as their brokerage account balances and turn loans over the instant they exit a trading position.

‘Borrow Endlessly’

“Now you can borrow endlessly,” Murakami said.

Pointing at price charts on his screens, the trader explained how each day he borrows millions of shares of fast-moving stocks like GungHo Online Entertainment Inc. (3765) and Fast Retailing Co. (9983), the most-heavily weighted company on the Nikkei 225, and sells them short.

Leveraging Millions

One of Murakami’s friends, who goes by the blog name Tesuta, said looser rules let him leverage $4.5 million in cash into as much as $67 million in daily stock bets. He held up a hand-written ledger and showed his account balance at SBI Holdings Inc. as proof. He asked that his name not be cited for privacy reasons.

The number of shares traded by individuals rose to a record in May, some 43 percent of Japan’s total equity volume, up from 27 percent before the rally started in November, according to the Tokyo Stock Exchange.

On an average day, the group of seven day traders to which Murakami and Tesuta belong buy and sell somewhere between $80 million to $100 million in Japanese stocks, according to estimates from the members.

Tesuta has tripled his fortune to $4.5 million this year, he said in an interview at a Chinese restaurant in Osaka. Making 200 to 300 trades each day and cutting losses quickly to minimize the cost of bad bets, the 33-year-old said he’s managed to profit even amid the market’s recent decline by trading stocks like Tokyo Electric.

Battered by the meltdowns at Fukushima, the utility has become a favorite of speculators, moving more than 7 percent on an average day this year and accounting for about one in every 10 shares changing hands on the Nikkei 225 last month.

What Can Possibly Go Wrong?

With speculators borrowing millions to day trade on 300% leverage utilizing an "endless" supply of margin, and some utility stocks swing 7% every day ... inquiring minds may be asking "what can possibly go wrong with that?"

Actually, the resurgence of leveraged day trading (along with wicked gyrations in the bond markets) is a huge warning sign that something already has seriously gone wrong.

Every ramification of the upcoming blowup of Abenomics cannot be predicted in advance, but the consequences are 100% guaranteed to be severe.

Right now, Japanese prime minister Shinzō Abe is considered a hero for his Abenomics program. When the dust finally settles, Abenomics is more likely to be considered in the same vein as John Law's Mississippi Bubble than Abe will be considered any kind of hero.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com