The Tokyo Stock Exchange (TSSE) was forced to close trading 20 minutes early on Wednesday because its trading system was unable to cope with a surge in sell orders.
At 1pm on Wednesday the TSE appealed to investors to consolidate orders - including program orders - in order to prevent a shutdown.
The exchange said it had handled 2.32 million transactions in the morning session but warned that if the system limit of four million transactions was reached it would be forced to halt trading.
The spike in orders was triggered by panic selling that stemmed from fraud allegations surrounding Internet services firm Livedoor. News that Livedoor was raided by prosecutors led to investors dumping stock across the board on Tuesday, and they continued to sell heavily on Wednesday morning.
Taizo Nishimuro, president of the TSE, told reporters that the investigation news spooked individual investors and prompted them to sell broad-based stocks. The sell-off is thought to have wiped out more than $300bn in shareholder value in just three trading days.
But news that the exchange could shut down earlier led to another rush of panic selling, which rapidly pushed the number of transactions on the TSE dealing system up to four million. The exchange finally halted trading at 2:40pm.
The shut down is the latest in a series of problems with the TSE's trading platform and follows an incident last month where the computer systems failed to cancel a mistaken order from a Mizuho trader to sell 610,000 shares for 1 yen, instead of one share for 610,000 yen. The trading error left Japan's second largest bank nursing Y40 billion losses.
That glitch came only weeks after the TSE suffered a systems crash that halted trading for more than four hours on 1 November 2005.
In December exchange chief executive Takuo Tsurushima, along with two other senior executives, resigned following the operational failures.