Mar­ket reg­u­la­tors need to fix loop­holes: an­a­lysts

China Daily (Hong Kong) - - NATION / DIGEST - By XIE YU in Shang­hai xieyu@chi­nadaily.com.cn

Af­ter a trad­ing glitch sent the Shang­hai Com­pos­ite into a his­tor­i­cal buy­ing frenzy two weeks ago and sparked an in­ves­ti­ga­tion by China’s se­cu­ri­ties reg­u­la­tors, an­a­lysts say the na­tion’s reg­u­la­tors are at a loss on how to fix the de­fi­cien­cies. The China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion said on Aug 18 that it was launch­ing a probe into State­con­trolled Ever­bright Se­cu­ri­ties Co, which is sus­pended from trad­ing on Aug 16 af­ter it said an er­ror in its trad­ing sys­tem led to 7.2 bil­lion yuan($1.18 bil­lion) in un­in­ten­tional stock pur­chases. The surge in or­ders pushed the bench­mark Shang­hai Com­pos­ite In­dex by 5 per­cent in two min­utes on Aug 16 be­fore it ended 0.6 per­cent lower.

On Sun­day, a bourse spokesman said at a news con­fer­ence that they will im­prove its risk con­trol mea­sures to pre­vent sim­i­lar in­ci­dents from hap­pen­ing.

Comment The CSRC, on the other hand, said it has wrapped up its in­ves­ti­ga­tion into Ever­bright and will an­nounce its find­ings as soon as pos­si­ble.

An­a­lysts say the in­ci­dent ex­posed the na­tion’s reg­u­la­tory short­com­ings and loop­holes in China’s se­cu­ri­ties trad­ing sys­tem.

Un­der the Shang­hai Com­pos­ite’s cur­rent mon­i­tor­ing sys­tem, ab­nor­mal trans­ac­tions can only be dis­cov­ered af­ter or­ders have been placed.

“The in­ci­dent seems like a bro­ker­age’s credit cri­sis, but it re­flects loop­holes with China’s se­cu­ri­ties and fu­tures trad­ing sys­tem,” said Lu Hongjun, pres­i­dent of Shang­hai In­sti­tute of In­ter­na­tional Fi­nance.

Lu said the bourse’s trans­ac­tion sys­tem has clear de­fects. One mea­sure it should take is to in­ter­vene when it has dis­cov­ered that a bro­ker­age’s buy or­ders has sur­passed its credit limit, he said. The bourse should also es­tab­lish a mech­a­nism to mon­i­tor quan­ti­ta­tive trad­ing, which in­volves the use of com­put­ers to find pat­terns in fi­nan­cial data.

Ever­bright said in an ear­lier fil­ing to the Shang­hai Stock Ex­change that the com­pany had set up an up­per limit of 80 mil­lion yuan for its ar­bi­trage­trad­ing sys­tem, but an er­ror in its quan­ti­ta­tive trad­ing sys­tem gen­er­ated buy or­ders of 23.4 bil­lion yuan, of which 7.2 bil­lion yuan was traded suc­cess­fully.

“The bourses should block trad­ing when find­ing ab­nor­mal phe­nom­ena, in­clud­ing un­usu­ally large vol­ume or­ders. The buy or­ders is­sued by Ever­bright that day were worth 107 per­cent of its net as­sets, which is ob­vi­ously prob­lem­atic,” Lu said.

If un­usual vol­ume or­ders are placed, the bourse should re­port the move­ments to the mar­ket and in­vestors im­me­di­ately, he added.

On Aug 16, the Shang­hai Stock Ex­change is­sued a state­ment at 11:44 am on its of­fi­cial web­site, claim­ing its trad­ing sys­tem was run­ning nor­mally. Ever­bright did not an­nounce its er­ror un­til 2:25 pm. The mar­ket closes at 5 pm.

Dur­ing this time­frame, Ever­bright in­creased its short po­si­tions on in­dex fu­tures con­tracts, and got 7,023 con­tracts, worth about 4.82 bil­lion yuan, as the trad­ing day came to a close.

The com­pany ex­plained the move as a “rem­edy” for the er­ror that oc­curred in its quan­ti­ta­tive trad­ing sys­tem. An­a­lysts and lawyers are claim­ing that the move was in­sider trad­ing that took ad­van­tage of in­vestors who had no knowl­edge of what had hap­pened.

“There seems to be a lack of cross-mar­ket su­per­vi­sion. When there is an un­usual move­ment of large-vol­ume cap­i­tal in the eq­uity mar­ket, the fu­tures mar­ket should stay alert and take ac­tion,” said Hu Yuyue, di­rec­tor of the se­cu­ri­ties and fu­tures re­search in­sti­tute un­der Bei­jing Tech­nol­ogy and Busi­ness Univer­sity.

The use of quan­ti­ta­tive trad­ing has in re­cent years made ac­count­abil­ity more com­pli­cated, said Hu, adding that trad­ing sys­tem de­sign­ers and pol­i­cy­mak­ers should think more about risk con­trol in trad­ing.

Lu said leg­is­lat­ing bod­ies should of­fer more spe­cific def­i­ni­tions of in­side trad­ing and mar­ket ma­nip­u­la­tion.

Dur­ing the Ever­bright pur­chase frenzy, many small in­vestors took the surge as an of­fi­cial sup­port of the stock mar­ket and fol­lowed with pur­chases of their own. Short-sell­ers in par­tic­u­lar suf­fered losses from the sud­den surge in the in­dex.

Gen Shuang, se­nior part­ner of Guangzhou- based Best­found Law Firm, said courts will not ac­cept their law­suits for com­pen­sa­tion un­less the CSRC de­fines what Ever­bright did as “mar­ket ma­nip­u­la­tion”.

Strict su­per­vi­sion

Two days af­ter the Ever­bright in­ci­dent, Xiao Gang, head of the CSRC, chaired an in­ter­nal con­fer­ence in Bei­jing, pro­mot­ing a new guide­line re­in­forc­ing in­ves­ti­ga­tions into stock and fu­tures mar­kets.

“It seems Xiao has the sup­port from higher lev­els to cure the dis­ease of the stock mar­ket,” a source close to the CSRC told China Daily. The CSRC re­ports di­rectly to China’s State Coun­cil.

Xiao’s new ar­range­ments in­clude dou­bling the num­ber of mar­ket in­ves­ti­ga­tors to 600 and send­ing them to six se­cu­ri­ties and fu­tures bourses.

In early Au­gust, Xiao pub­lished an ar­ti­cle in Qiushi Jour­nal, a po­lit­i­cal pe­ri­od­i­cal run by the Cen­tral Com­mit­tee of the Com­mu­nist Party of China, say­ing that the CSRC in­ves­ti­ga­tors face a range of prob­lems in de­tect­ing vi­o­la­tions, from gath­er­ing ev­i­dence on mis­con­duct to con­vict­ing vi­o­la­tors.

“Co­or­di­na­tion be­tween the CSRC and pub­lic se­cu­rity is very im­por­tant, as in­ves­ti­ga­tions into fi­nan­cial crimes are very com­plex and re­quire pro­fes­sion­als. Joint work from both fi­nan­cial au­thor­i­ties and pub­lic se­cu­rity or­gans not only fa­cil­i­tates in­ves­ti­ga­tion, but it also pro­vides big­ger de­ter­rents,” Lu said.

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