Everbright Trading Error Adds to China Broker’s Woes

Everbright Trading Error Adds to China Broker’s Woes

Everbright Securities Co. (601788), the Chinese state-controlled brokerage besieged by falling profits and a regulatory probe, faces a further blow to its reputation after a trading error sparked the wildest swings in the nation’s stocks in four years.

The China Securities Regulatory Commission has started an official investigation into Everbright, the watchdog said in a statement yesterday. The regulator has banned the brokerage from conducting proprietary trading from Aug. 29 to Nov. 18, according to a company statement. Everbright is barred from creating new stock-index futures positions starting today, according to a statement by China Financial Futures Exchange.Everbright’s stock has dropped 14 percent this year as the CSRC in June began a probe into its role in an initial public offering, forcing it to delay a $1.3 billion share sale. Its earnings, which have declined for three straight years, may be eroded by companies delaying fundraising in the world’s second-worst performing stock market. The Shanghai exchange and the securities watchdog also began probes into Everbright’s trades.

“The incident indicates that there might be some weaknesses in the firm’s risk controls,” Niu Bokun, a Beijing-based analyst at HuaChuang Securities Co., said by phone. “The market will focus next on what the CSRC will do, whether it will ask securities firms to take a look at their internal controls.”

Shares Suspended

The company reported a mark-to-market loss of about 194 million yuan ($31.7 million) based on Aug. 16 closing prices, and the final value may change, the company said in a statement to the Shanghai exchange yesterday. Everbright’s shares, suspended in Shanghai since Aug. 16, will resume trading tomorrow.

Everbright’s trading system placed an accumulated 23.4 billion yuan of buy orders, of which 7.27 billion yuan was transacted. The brokerage sold 1.85 billion yuan in exchange-traded funds, along with short-selling 7,130 contracts of index futures, according to the statement on the CSRC website.

The brokerage detected order-generation and execution defects in an arbitrage-trading system under its strategic investment department, the company said in its statement yesterday.

Company Apology

Everbright apologized and said the incident “brings negative impact to the company’s brand reputation and market image,” according to yesterday’s statement. It said it may face regulatory penalties.

China’s stock market was roiled by a 53 percent surge in trading volumes that sent the Shanghai Composite Index (SHCOMP) to its biggest intraday gain since March 2009. The gauge 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. It closed down 0.6 percent.

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. Separately, 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 bought by Getco LLC to create KCG Holdings Inc. (KCG)

Arbitrage System

“When the proprietary operation of the strategic investment department of Everbright Securities used its independent arbitrage system, it encountered a problem,” Everbright said in its statement to the Shanghai stock exchange last week. All other operations are normal, China’s fifth-largest brokerage by market value said.

“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 last week. “This is an extraordinarily big loophole, which doesn’t just show defects in Everbright, but also the A-share market.”

Shares in the brokerage were suspended for the afternoon session on the Shanghai bourse, after rising 6.7 percent to 12.12 yuan earlier that day. The stock’s decline this year has surpassed the 8.8 percent fall in the equity benchmark.

The brokerage’s profit has declined for three straight years as stock trading and underwriting businesses shrank amid the market slump. Equity trading in Shanghai and Shenzhen fell 25 percent in 2012 and funds raised from domestic share sales decreased 64 percent, Everbright said in its 2012 annual report.

Falling Profit

Its net income fell 35 percent to 1 billion yuan ($164 million) last year, according to a March exchange filing. The company is scheduled to report first-half earnings on Aug. 22.

Everbright 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 IPO. 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 new rules are introduced.

Underwriting new stock offerings accounted for about 70 percent of Chinese brokerages’ investment-banking revenue from 2009 through 2011, according to Shenyin & Wanguo Securities Co.

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.

“This will certainly hurt Everbright Securities’ reputation, and there may be other negative effects such as penalties,” Fanny Chen, a Hong Kong-based analyst at Haitong International Securities Group, said by phone.

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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