Everbright Securities hit with record fine for trading error

Mainland securities company ordered to pay 523 million yuan penalty, while four executives are fined and barred from industry for life

PUBLISHED : Friday, 30 August, 2013, 6:22pm
UPDATED : Saturday, 31 August, 2013, 4:16am

The mainland securities regulator fined state-controlled broker Everbright Securities a record 523 million yuan (HK$663 million) for a trading error that caused chaos on the Shanghai stock exchange two weeks ago.

The China Securities Regulatory Commission (CSRC) urged other institutional investors to focus on risk control to prevent similar incidents from happening again.

It said the system fault in Everbright's proprietary trading unit should see all securities firms examine their practices. It warned them to be careful with program trading - a popular investment strategy in which a computer is programmed to trade in response to selected conditions.

The fines were a message … [the] regulator has zero tolerance for irregularities

Everbright's improper gain of 87.2 million yuan was confiscated, and the brokerage was fined 436 million yuan for misconduct, the CSRC said.

Four senior Everbright executives, including Xu Haoming, the president, who resigned last week, were barred from the stock market for life, and each of them was fined 600,000 yuan, it added.

"The fines highlighted the regulator's determination to punish those violating laws and regulations," the CSRC said. "The regulator will stand firm against irregularities to ensure fairness in the market."

On the morning of August 16, an erroneous trade caused by Everbright's "arbitrage system" mistakenly placed a buy order for more than 20 billion yuan of shares. Transactions worth 7.3 billion yuan ensued.

The glitch caused the benchmark index to surge nearly 6 per cent within minutes and then slump back to its earlier level.

Everbright, in order to stem losses, sold shares and index futures immediately after the glitch, making a profit of 87.2 million yuan on the trades, the CSRC found, describing the firm's conduct as insider trading because it had failed to release information about the trading error to the public before conducting the transactions.

Everbright said in an earlier statement earlier that its errant trades had caused a loss of about 200 million yuan.

Investors who chased the short-lived rally are believed to have lost billions of yuan. The CSRC said Everbright's "arbitrage system" never passed its internal risk-assessment tests.

The record fine is a sign that the regulator will step up its policing of arbitrage trading based on preprogrammed mathematical calculations.

A source close to the CSRC said the regulator had realised the necessity of probing brokerages' program trading systems, even though the funds managed by the computer software represented a small portion of the market's value.

"The fines were a message from the regulator that it has zero tolerance for irregularities," Shenyin Wanguo Securities analyst Gui Haoming said.

"It's good news for retail investors, as the regulator showed its resolve to protect them."

The CSRC said Everbright would be held responsible for compensating other investors for their losses resulting from the trading error.

It encouraged the victims to take Everbright to court to seek compensation.