Everbright Accused of Insider Trading

August 28, 2013 Leave a comment

Everbright Accused of Insider Trading

08-27 15:51 Caijing

The Everbright fat finger incident that occurred Aug. 16, which is a first since the inception of China’s capital market, will likely hinder business innovation by domestic dealers.

By staff reporters Qu Yanli and Liu Wenju

The Shanghai Composite Index jumped 5.96 percent in a matter of seconds at around 11 a.m. on Aug. 16, 2013. The unprecedented flash rally drove a number of blue-chip stocks from the banking and oil industries, which have been sluggish for a long time, up by their daily limit. Investors, hoping to get a piece of the action, rushed into the market, amid a series of rumors and speculation over the cause of the spike. Supervisory authorities were soon alerted to the incident.Initial investigations have identified a program logic error at the back-end of the arbitrage system adopted by Everbright Securities’ (Everbright) strategic investment department as the cause of Everbright’s trading error. Buy orders worth a total of 23.4 billion yuan were erroneously placed within seconds, of which 7.27 billion yuan’s worth of orders were fulfilled at market prices, as no risk-control measures were implemented at the front-end to cap the total trading volume.

The China Securities Regulatory Commission (CSRC) launched an official investigation into this incident, which may prove far more complicated than the regulator had anticipated. Everbright short sold 6,877 lots of index futures Aug. 16, with total transaction volume amounting to 4.74 billion yuan, as it sought to hedge against the risks posed by its net-long position. The question of whether Everbright’s hedging operations constitute insider trading and market manipulation has been the subject of heated debate among industry insiders. Regulatory authorities are investigating the matter, though no substantial evidence has been found as of Aug. 22, according to sources close to the regulator.

Industry insiders think the incident have a negative impact on Everbright’s reputation and future business development. The company’s private placement, originally scheduled for completion this year, will have to be put off indefinitely after the brokerage’s fat finger trade triggered sharp market swings and, prior to this, the firm came under investigation for Henan Tianfon Energy-Saving Panel Science and Technology Co., Ltd’s IPO case. Moreover, it is widely expected that in the aftermath of the incident, the AA brokerage will be downgraded by regulators next year. In related news, a peer brokerage recently received a six-notch downgrade.

A CSRC spokesman said the incident Aug. 16 is a first since the inception of China’s capital market and remains an isolated incident. However, Chinese brokerages must become fully aware of the problems exposed in this incident, said the spokesman.

“Quantitative investing, which sparked Everbright’s fat finger trade, is fairly common among large brokerages’ proprietary trading arms. The CSRC will probe into other securities dealers to look for hidden dangers,” said a source close to the agency.

The incident, which is bound to have a lasting impact on the development of the securities industry, will probably hinder business innovation by domestic dealers, say industry veterans. Insiders are worried that the regulatory agency, which stressed the need for securities traders to control risks while innovating in the first half of this year, may order a halt to certain innovative services due to the fat finger trade.

Filed under Macro Trends

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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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