'Trading error' leads to stock market spike

By Liang Fei Source:Global Times Published: 2013-8-17 0:58:02

A trading error by a brokerage on Friday triggered a surprising spike in the Shanghai Stock Exchange in the morning session, with more than 50 weighted stocks surging to the daily limit of 10 percent before paring gains.

The benchmark Shanghai Composite Index surged by as much as 5.6 percent shortly after 11 am on Friday. Major stocks on the Shanghai bourse such as Industrial and Commercial Bank of China, Agricultural Bank of China, and PetroChina saw their share prices surge to the daily limit at the same time.

A number of rumors emerged regarding the sudden surge in the morning trading, ranging from trading errors to leaked policy announcements. But in the afternoon, the situation became clearer and it seems that all the volatility stemmed from a trading error.

Everbright Securities Co, China's fifth-largest brokerage by market value, said in a filing to the Shanghai Stock Exchange that one of its departments encountered problems when using the proprietary arbitrage trading system, and the company is already looking into the matter.

Some say that it was a "fat finger" human error, but a trading system developer who spoke on condition of anonymity told the Global Times that technology errors are also possible.

Media reports said that 7.2 billion yuan ($1.17 billion) were traded due to the error, and Everbright Securities has applied to cancel the morning trades. The company's stocks on the Shanghai bourse halted trading.

But the Shanghai bourse announced after the market closing that all completed trades would be cleared as usual, and the bourse and the China Securities Regulatory Commission (CSRC) are investigating the matter.

By the close, the Shanghai Composite Index had lost all its gains and ended 0.64 percent down.

"Numerous investors could have incurred losses on Friday due to the trading error by Everbright Securities, which is misleading to investors," Huang Jianzhong, a finance professor at Shanghai Normal University, told the Global Times on Friday.

The sudden surge in the morning session may have caused heavy losses for investors in short positions in the stock index futures market, as stock index futures for August settled on Friday, Huang noted.

Also, some retail investors became tied up as they made additional buys after the short surge on Friday, as mainland investors are more easily affected by market rumors. 

Though the trading error led to losses by numerous investors, Li Jian, a lawyer at Zhejiang Yufeng Law Firm specializing in stock market cases, said that it would be hard for investors to claim compensation.

Everbright Securities declined to comment on the matter when contacted by the Global Times on Friday, but media reports said that it is still difficult at present to estimate the company's losses.

Everbright Securities' half-year financial report is not available yet, but its net profit was only 537 million yuan in the first quarter. Some analysts said that the company's August performance will be greatly dampened given the 7.2 billion yuan trading error.

However, Huang noted that it is still not certain that Everbright Securities will incur losses, as the company may still benefit from the dropping Shanghai Composite Index on Friday as data showed that it has increased its positions in short selling the stock index futures on Friday.

Huang noted that the "trading error" is very suspicious, as it occurred on the settling day for stock index futures. "I hope the CSRC can investigate the matter thoroughly and provide a clear result to investors."

If the CSRC investigation finally shows that the trading error was in fact a deliberate manipulation of the market, investors could still sue the company and claim compensation, Huang noted.

Li Daxiao, director of research at Yingda Securities, said on his Sina Weibo that brokerages should consider adding limits to traders' rights and setting up a mechanism to supervise abnormal trading to avoid future "fat finger" errors.


Posted in: Business, Markets

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