Rumors swirl on trading rout

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By Yu Ran in Shanghai (China Daily) 11:03, August 20, 2013

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A rumor has spread that a Taiwan team working for Everbright Securities Co Ltd was responsible for the trading error that triggered a surge in the mainland's stock market on Friday by placing a wrong order in the system, the 21st Century Business Herald reported.

A computer-simulated order was entered in the real-time operations by the team in the company's trading platform and caused the benchmark Shanghai Composite Index to gain more than 5 percent within two minutes, the newspaper said, citing a source at the company.

The source said that the transaction was a test that shouldn't have been conducted in a live trading system.

There was also speculation that the error was caused by a typing error by a trader, who placed an order for 3 billion shares - not the intended 30 million.

The Taiwan team under the company's strategic investment department was testing an investment model on Friday morning, unaware that they were using the actual platform.

That ultimately led to the error in the number of shares traded, because the mainland and Taiwan use different units in stock market trading.

The error triggered a huge volume of transactions, especially involving a fund that bought blue-chip shares. The shares of Industrial and Commercial Bank of China Co Ltd and PetroChina Co Ltd were also caught up in the market storm.

"Conducting a computer simulation in a real-time trading platform was a failure of risk control for the company, whether it was caused by the team of Taiwan employees or a local trader," said an Orient Securities Co Ltd analyst, speaking on condition of anonymity.

To clarify the error, Everbright Securities issued a statement later Friday to the Shanghai Stock Exchange, saying that its investment strategy department encountered a problem in its arbitrage system while operating with its own funds in the morning session.

However, the company had denied those rumors completely at a news conference on Sunday.

Mei Jian, secretary of Everbright's board of directors, denied rumors that the trades involved would be cancelled.

Mei said the company's internal simulated trading system was used in a real-time trading environment, which led to a huge volume of orders being transacted in a short time.

Another mysterious aspect of the incident is the huge amount of money involved, and how Everbright funded the trades.

According to a notice from the China Securities Regulatory Commission, the problematic strategic trading system of Everbright declared a total of 23.4 billion yuan in buying orders.

As of Dec 31, 2012, the net capital of the company was about 13.1 billion yuan and net assets were about 21.7 billion yuan. Both figures are far lower than the amount of money declared in the transactions.

Brokerage industry sources speculated that there was a "certain cash flow from overseas" that got involved in the transaction as well.

Yet at the news conference, Mei stated that the company didn't have 23 billion yuan in its accounts at the time of the incident. He also said that there was no involvement by overseas funds to support the transactions.

"It is very hard to explain how Everbright had such a huge amount of money in the account to declare for the purchase orders, which shouldn't be passed through if there was not enough money for possible transactions," said a source at a trader involved with the Shanghai Stock Exchange.