Everbright Securities “Fat Finger” Trading Error Roils Shanghai Stock Market

August 18, 2013 Leave a comment

Everbright Securities Trading Error Roils Shanghai Stock Market

Everbright Securities Co. (601788), the state-controlled Chinese brokerage that’s part of a group including financial firms and hotels, is probing a trading error that roiled the country’s stock market yesterday. The China Securities Regulatory Commission is investigating a surge in the Shanghai Composite Index (SHCOMP) caused by large share purchases by Everbright, the regulator said in a statement yesterday. All other operations are normal, China’s fifth-largest brokerage by market value said in a statement to the bourse.China’s stock market was put in turmoil by a 53 percent surge in trading volumes that sent the benchmark index to its biggest intraday gain since March 2009. Disruptions in electronic markets have been under scrutiny since a May 2010 incident in which the Dow Jones Industrial Average fell almost 1,000 points in minutes before rebounding.

“This is a negative development for Everbright’s stock,” said Liu Jun, an analyst at Chang Jiang Securities Co. in the central city of Wuhan. “Everbright Securities’ business transformation has been slower than expected and its investment banking business is under investigation, which could affect its bond underwriting.”

The Shanghai Composite jumped from a loss of as much as 1 percent to a gain of 5.6 percent in two minutes during the morning session, as 16 of the measure’s 20 biggest companies by weighting increased by the 10 percent daily limit. The gauge closed with a loss of 0.6 percent.

Shares Suspended

The Shanghai Stock Exchange is also investigating Everbright’s trades, the securities regulator said.

Shares in Everbright Securities were suspended for the afternoon session in Shanghai, after rising 6.7 percent to 12.12 yuan in the morning. The stock has declined 14 percent this year, surpassing the 8.8 percent fall in the equity benchmark.

“When the proprietary operation of the strategic investment department of Everbright Securities used its independent arbitrage system, it encountered a problem,” Everbright Securities said in its statement to the Shanghai stock exchange yesterday. Board Secretary Mei Jian declined to comment further.

The brokerage’s profit has declined for three straight years, with net income falling 35 percent to 1 billion yuan ($164 million) last year, according to a March exchange filing. It is scheduled to report first-half earnings on Aug. 22.

Everbright Securities in June said it’s being investigated by China’s securities regulator for its work on Henan Tianfon Energy-Saving Panel Science & Technology Co.’s proposed initial public offering. The market watchdog has also frozen approvals for IPOs for more than 10 months amid a crackdown on fraud and misconduct by companies and bankers, and has said it won’t allow listings to resume until the CSRC introduces new rules.

Sale Delayed

The brokerage’s plan to raise as much as 8 billion yuan from a private placement of its shares was also blocked by the securities regulator last month after it started investigating the firm.

China Everbright Group and its Hong Kong-listed unit, China Everbright Ltd. (165), hold 67 percent of Shanghai-based Everbright Securities. Everbright Ltd. fell 5.5 percent, the biggest drop in more than a year, to close at HK$11.04 in Hong Kong trading.

The closely held parent group, led by Chairman Tang Shuangning and supervised by China’s State Council, has businesses spanning from banking, broking, insurance, futures and asset management to hotels, tourism and property development. Established in 1983, it had 2.4 trillion yuan of assets and almost 50,000 employees at the end of last year, according to its website.

‘‘I haven’t seen this kind of error in at least the past 10 years,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group, said by telephone yesterday. “This is an extraordinarily big loophole, which doesn’t just show defects in Everbright, but also the A-share market.”

Knight Capital Group Inc. lost more than $450 million after sending erroneous orders to U.S. exchanges on Aug. 1, 2012, because of a computer malfunction. Knight was later purchased by Getco LLC to create KCG Holdings Inc. (KCG)

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net; Stephanie Tong in Hong Kong at stong17@bloomberg.net; Jun Luo in Shanghai at jluo6@bloomberg.net

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