Everbright 'fat finger' error sparks mad rally in Shanghai

Trading in mainland brokerage suspended after input blunder places order for 3 billion shares and sends stocks soaring amid copycat spree

PUBLISHED : Friday, 16 August, 2013, 2:42pm
UPDATED : Saturday, 17 August, 2013, 4:51am

Millions of mainland equity investors took a roller-coaster ride yesterday after an apparent "fat finger" trading error by China Everbright Securities which may have caused multibillion-yuan losses.

As a result of the trade, the Shanghai Composite Index surged about 6 per cent in two minutes before the end of the morning session. Sixteen major stocks rose by the 10 per cent daily limit, leaving investors and traders to guess at what was behind the strong rally.

Sources said a trader with Everbright was supposed to buy 30 million shares for the brokerage's exchange-traded fund. Instead, he mistakenly placed an order to buy 30 million lots, or three billion shares.

The "fat finger" trade - so named when someone presses the wrong key when inputting data - cost Everbright an extra 3 billion yuan. The trade attracted more than 3 billion yuan of copycat buying from other institutions on speculation that some major announcement was forthcoming.

"The incident could be written into the annals of China's stock market," said Dong Jun, a hedge fund manager. "Those who followed Everbright's irrational buying have paid a big price."

A trader with a Shanghai-based brokerage said his company, hoping to chase a short-term gain, increased its purchases of shares. The market was rife with speculation that the sudden surge was in response to incentives to be rolled out soon by the market regulator.

Trading in Everbright Securities was suspended in the afternoon after it admitted a problem had occurred in its "arbitrage system".

The China Securities Regulatory Commission said that the cause of the mistake was still unknown, and it would investigate the erroneous trade.

Mainland investors have been shunning the slumbering stock market for several months, discouraged by worries about worsening economic and corporate performance.

The number of stock trading accounts containing funds has dropped by more than two million since June 2011, to 54.4 million, according to Bloomberg data.

"The trading error showed that the market can be easily driven up by 6 per cent with a capital base of only 7 billion yuan," Gan Hua, a veteran retail investor, said. "This situation is more than a joke, and the regulator needs to spend time understanding the lesson."

Everbright applied to the Shanghai Stock Exchange to cancel the erroneous trade, but the exchange said in a statement all intraday trades yesterday were valid.

Everbright, the mainland's ninth-largest brokerage, came in for heavy criticism from investors, with some accusing it of manipulating the market.

A brokerage source said Everbright's "arbitrage system" had yet to pass through the internal "risk control" testing process.

Analysts said the "fat finger" trade could further depress the already weak A-share market, which has fallen 8.8 per cent this year.

Fat Finger Trades

January 2013: US natural gas futures slide 9 per cent to a three-month low, with the fall blamed on a glitch in an electronic trading programme.

September 2012: Brent oil futures worth US$1.4 billion plunge in a four-minute dive after an erroneous trade set off a slew of automatic computer trades.

August 2012: A trading blunder at Knight Capital Group left the firm nursing a US$440 million loss after just 45 minutes in the wake of a flurry of mistaken trades.

January 2011: Prices on US Treasury bonds slide after a US$6 billion sell order is placed in what traders claimed was a clerical error.

May 2010: The well-documented "flash crash" wipes 1,000 points from the Dow Jones Industrials Average in minutes after an erroneous US$4.1 billion sell order triggered a flood of automatic computer trades.