China Everbright Securities was ordered by the mainland securities watchdog yesterday to suspend its automated trading business after faults in the system caused chaos on the Shanghai stock market on Friday.
The China Securities Regulatory Commission said after completing an initial investigation that the chaotic trading did not involve human error. It was first thought that the events were triggered by a "fat finger" incident caused by a trader hitting a wrong button and turning trades for 30 million shares into three billion.
Rather, the securities watchdog said Everbright had "design flaws" in its automated trading system and had "obviously inadequate" internal risk controls.
"The investigation did not show human error, but China Everbright Securities has an obvious flaw in its system design and risk control," the CSRC said in a Chinese-language statement on its website. "The Shanghai CSRC has ordered the firm to suspend the related business and to make an internal investigation to … make improvements.
"Meanwhile, the CSRC has decided to conduct a formal investigation and will decide on a possible penalty."
The regulator added that the incident, the first of its kind on the mainland, showed the need for a review to prevent a recurrence.
Shanghai-listed Everbright, the mainland's ninth-largest brokerage, came in for heavy criticism from investors after its excessive buying orders on a number of stocks led to the Shanghai Composite Index surging by about 6 per cent in two minutes before the end of the morning session on Friday. Sixteen major stocks, including Industrial and Commercial Bank of China and Bank of China, rose by their 10 per cent daily limit.
Everbright yesterday issued a statement saying the error arose in its computer-based automated trading system.
Three batches of buying orders intended to amount to a combined value of 5.5 million yuan (HK$6.9 million) were entered into the system during the morning session.
Instead, 26,082 buying orders worth a total of 23.4 billion yuan were generated within two seconds at about 11.08am. This was well above the 80 million yuan limit, which was supposed to be the highest value of trades for the day.
Everbright said it suffered a loss of 194 million yuan, but more losses might arise depending on future market performance and the potential regulatory penalty. It apologised to investors and said the company had sufficient funds to settle the trades.