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Business
Print Edition> Business
UPDATED: August 26, 2013 NO. 35 AUGUST 29, 2013
A Dishonest Mistake
A brokerage trading system fault led to demands for more controls in the securities sector
By Zhou Xiaoyan
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A NOT-SO BRIGHT ACT: A pedestrian walks past an Everbright Securities billboard in Shanghai on August 19 (DING TING)

Everbright Securities Co. Ltd., China's fifth largest brokerage by market value, is under investigation after design flaws in its trading system triggered an unexpected huge buy and caused a startling rise in domestic A-share stocks on August 16.

On the morning of that day, China's stock markets had a roller coaster ride when the benchmark Shanghai Composite Index spiked 5.96 percent within three minutes before easing back in the afternoon. Almost all blue chips, including Industrial and Commercial Bank of China, Baosteel, Shanghai Pudong Development Bank, Agricultural Bank of China and Bank of Communications, hit their daily trading limits of 10 percent.

Traders and analysts called for an immediate investigation into possible price manipulation and insider trading. Experts say the securities sector is in dire need for more risk controls to protect individual investors, while short-sellers were furious and urged authorities to probe the case and come up with a compensation plan.

What happened?

Immediately after the dramatic flash rally in the morning of August 16, the Shanghai Stock Exchange checked its trading and technical system and found nothing wrong. Later, the bourse learned that all buy orders came from an Everbright Securities account and sent Shanghai securities authorities to inspect the cause. The China Securities Regulatory Commission (CSRC), the country's securities supervisory authority, then launched an investigation.

An initial probe showed that the accidental buy orders from an Everbright account was due to a technical glitch, the CSRC said in a news release on August 18. "It was not human error, but design flaws in a trade unit of China Everbright Securities that triggered the anomalous trades," reads a CSRC statement. "China Everbright Securities has obvious defects in internal controls, and information system management exposed serious problems."

The commission said the company sent a 23.4-billion-yuan ($3.71 billion) order to the Shanghai Stock Exchange and closed deals valued at 7.27 billion yuan ($1.15 billion) on the morning of August 16. Later that day, the brokerage sold 1.85 billion yuan ($293.65 million) shares in terms of exchange traded funds and launched short selling of 7,130 board lots or 71,300 stock index futures contracts, to hedge its losses. Short-sellers saw big losses because of the surprising surge in the morning, as August 16 was the date for index futures settlement.

The Shanghai Securities Regulatory Bureau stopped Everbright Securities' related business and is investigating who is responsible for the error.

Everbright Securities initially denied its mistake caused the dramatic morning surge, but later admitted fault.

On August 18, the brokerage held a press conference, saying its strategic investment department's proprietary trading bureau encountered a problem when using its own arbitrage system.

"After placing an 80-million-yuan ($12.7 million) buy order at 11:02 a.m. on August 16, the arbitrage system didn't get feedback as it usually does. Then, the system made a wrong judgment and made repetitive orders," said Xu Haoming, President of Everbright Securities, who later resigned over the incident.

Because of a T+1 system in China's spot stock market, the brokerage could not sell shares it bought on the same day, which forced it to build huge short positions in the index futures market, totaling 7,130 lots, the brokerage said. The company also said it was met with 194 million yuan ($30.8 million) in losses because of the system error and apologized over the incident.

This event has pushed the brokerage across the regulatory red line, and the company may receive warnings or a punishment from the regulator. "It may also restrain business performance and damage our brand," read a company statement.

Everbright board secretary Mei Jian pledged at the conference to fulfill compensation responsibilities to investors if the CSRC ordered so after the investigation.

Trading of the brokerage's A-shares resumed on August 20, ending with a drop that hit trading limits. The company's proprietary trading in stocks in the spot market has been suspended for three months until November 18. At least four fund companies lowered their valuation for Everbright Securities, with the highest decline being 15 percent.

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