Trading error sparks nationwide probe

The trading mishap caused by Everbright Securities has raised the hackles of the regulators, who will soon launch a probe into the trading systems at financial institutions nationwide.

In focus is arbitrage trading based on pre-programmed mathematical calculations, or "algo", or "quants", which market watchers say mainland firms may have embraced without fully understanding the risks involved.

The Shanghai Stock Exchange is also considering setting up a circuit-breaking mechanism as part of efforts to avoid a repeat of the August 16 trading error that triggered the biggest swing in its benchmark index since 2009.

The exchange would also consider allowing the cancelling of trades in incidents similar to the erroneous buy orders of Everbright, an unidentified spokesman from the exchange said on its Weibo platform yesterday.

The exchange was also looking into allowing investors to buy and sell the same stock on the same day, to protect the rights of small investors, the spokesman said.

"Mainland fund managers are only primary school pupils and they shouldn't have dared trying their hand at exercises meant for high school students," said a source close to the China Securities Regulatory Commission. "Unfortunately, the regulator wasn't fully aware of the risks and it has now decided to make amends for the mistake."

Program trading - an investment strategy driven by a computer programmed to respond to pre-selected conditions - has increased in popularity on the mainland since the launch of stock index futures in 2010, which created an arbitrage system for fund managers.