The worst trading stoppage in the history of the Tokyo Stock Exchange on Tuesday cast a shadow over its plans for an initial public offering.

Traders were unable to buy and sell shares on the world’s second biggest bourse for all but one and a half hours of the session.

The TSE was forced to suspend trading for four and a half hours because of a software error.

Some investors said the glitch had damaged the exchange’s reputation ahead of a planned listing scheduled for next year or 2007. Shigeharu Shiraishi, a managing director at Societe Generale Asset Management (Japan) Co, told Bloomberg it was “a big obstacle to its IPO plan.”

The stoppage did little to deter bullish investors who piled into the market when the TSE finally opened an hour and a half before its scheduled 3pm close. The Nikkei 225 leapt to a four-and-a-half year closing high and the broader Topix index hit a new five year high as investors responded to Monday’s appointment of a reform-minded Japanese cabinet.

Shares worth 1.9 trillion yen were traded on Topix, just 6 per cent below the average daily level for the last three months.

Oki Matsumoto, president of Monex Beans, the Japanese brokerage, said the new record high was all the more impressive because “usually in this kind of environment the market tends to go south” as nervous investors tried to liquidate their positions.

A TSE spokesman said the shutdown appeared to be connected to its decision to expand the trading system’s capacity last month in response to high trading volume. The changed system worked well until the end of the month, when the automatic monthly cleaning up of the trading software produced a glitch that paralysed it.

The spokesman said the problem was not expected to recur at the end of this month, since it had now been corrected. But he added that the exchange was checking to see if there were other problems.

The TSE’s back-up system failed too, because it uses the same software as the main system.

Some market participants questioned the effectiveness of the TSE’s response to the problem. One investment bank official in Tokyo said: “The TSE doesn’t have the best reputation for crisis management.”

Trading in the bulk of TSE shares was suspended for a morning in 1997 after a system glitch, but at that time some stock could still be traded manually. The TSE spokesman said this was the first time the exchange’s entire share trading operations had been shut down. The exchange is 56 years old.

Under TSE rules, member firms will be compensated if it is found that the exchange has shown “gross negligence”.

The Nikkei rose 1.9 per cent to 13,867.86 while the Topix rose 2 per cent to 1,473.02.

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