Everbright Securities in new error

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By Chen Tian (Global Times) 09:20, August 20, 2013

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Everbright Securities Co, which mistakenly caused a wild swing in the Shanghai Composite Index on Friday, added to the error Monday morning by selling 10-year government bonds at an incorrect price.

The financial market department of Everbright Securities, the fifth-largest brokerage in China in terms of market value, mistakenly inputted a yield of 4.20 percent, 25 basis points higher than the bond's yield at the end of Friday, the company said in a statement posted on its website Monday.

The brokerage is working with the buyer to find a solution, the statement said.

The incident came on the heels of problems with the brokerage's proprietary trading system that created 26,082 unexpected orders within two minutes on Friday morning and sent them all to the Shanghai Stock Exchange.

The error caused a sudden 5.6 percent spike in the benchmark Shanghai Composite Index, which reached 2,148.39 at 11:30 am on Friday.

Analysts said the problems have exposed drawbacks in China's stock market as it shifts from a basic model of managing IPOs and retail investment to a more advanced and complicated system containing financial innovations.

"Since financial innovations and technologies allowing for large-scale transactions are at a very initial stage of development in China, the country still lacks the talent, a complete supervision regime and the legal support to prevent mistakes from happening," Huang Jianzhong, a finance professor at Shanghai Normal University, told the Global Times Monday.

Because of the error on Friday, the China Financial Futures Exchange (CFFE) said it had banned Everbright Securities from building new positions in index futures since Monday.

"In the meantime, we will push Everbright Securities to deal with its current positions in order to maintain the stability of the securities and futures markets," the CFFE said in an announcement posted on its website Sunday.

Meanwhile, the Shanghai branch of the China Securities Regulatory Commission (CSRC) has barred Everbright Securities from proprietary trading for three months, the company said Sunday.

Everbright Securities now faces a difficult PR situation, with some market watchers criticizing the firm for failing to disclose information about Friday's error immediately. Others have suggested the errors were in fact a deliberate effort to make illegal profits.

In response, the brokerage firm issued a statement Monday saying that it will not sell the stocks it accidentally bought on Friday before it releases plans detailing how it will deal with the extra holdings. Also, the company will close the short positions of index futures contracts it bought on Friday.

"If our company makes a profit out of closing the positions, we promise that we will be dealt with according to the law," the statement said.

Zhu Lixu, an analyst with Xiaoxiang Securities, told the Global Times Monday that the CSRC should launch a supervision system as soon as possible to prevent such errors from occurring again.

"The regulatory body needs to establish a system to supervise all the orders and to intercept abnormal transactions, and it has to delineate the responsibilities of companies' personnel regarding supervising the orders," Zhu said.