Er­ror costs Ever­bright mil­lions

For­mer CEO banned from in­dus­try af­ter com­put­er­ized trad­ing mis­take

China Daily (Hong Kong) - - FRONT PAGE - By CHEN JIA chen­jia1@chi­

It took only three min­utes. The op­er­a­tional er­ror made by Ever­bright Se­cu­ri­ties two weeks ago has earned it a 523 mil­lion yuan ($ 85 mil­lion) fine from the na­tion’s top se­cu­ri­ties reg­u­la­tor, for in­sider trad­ing, re­lease of mis­lead­ing in­for­ma­tion, and muffed risk con­trol.

That is the largest fine the reg­u­la­tor has ever given a se­cu­ri­ties bro­ker­age in the his­tory of the coun­try’s stock mar­ket.

China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion an­nounced the puni­tive mea­sures on Fri­day af­ter a two-week in­ves­ti­ga­tion of Ever­bright Se­cu­ri­ties’ near hys­ter­i­cal trad­ing be­hav­ior that shocked the do­mes­tic A-share mar­ket on Aug 16.

The bro­ker­age will be fined five times its in­sider- trad­ing-re­lated gains, the CSRC spokesman said.

In ad­di­tion, Ever­bright Se­cu­ri­ties’ for­mer pres­i­dent Xu Haom­ing, as­sis­tant ex­ec­u­tive Yang Chizhong, gen­eral man­ager of the ac­count­ing depart­ment Shen Shiguang and gen­eral man­ager of the strate­gic in­vest­ment depart­ment Yang Jianbo were each fined 600,000 yuan. And they were all banned from the se­cu­ri­ties in­dus­try for life.

Xu re­signed af­ter the firm caused the big­gest swing in the bench­mark stock in­dex since 2009.

Mei Jian, sec­re­tary of the board of di­rec­tors of Ever­bright Se­cu­ri­ties, was fined 200,000 yuan for giv­ing the me­dia er­ro­neous in­for­ma­tion on how the ab­nor­mal mar­ket fluc­tu­a­tion oc­curred, an er­ror that in­flu­enced in­vestors’ de­ci­sions that day.

The CSRC also banned the se­cu­ri­ties com­pany from pro­pri­etary trad­ing for three months and sus­pended ap­proval for new Ever­bright ser­vices.

The penal­ties may hurt the com­pany’s busi­ness and its brand rep­u­ta­tion, pos­si­bly caus­ing its shares to drop sharply next week, an­a­lysts said.

How­ever, on­line chat rooms were abuzz with peo­ple say­ing the penal­ties were too le­nient.

As of 9 pm on Fri­day, a sur­vey on, a pop­u­lar news por­tal, showed that more than 80 per­cent of 30,000 re­spon­dents thought that Ever­bright had ma­nip­u­lated the stock mar­ket and should be fined more.

Ever­bright’s pro­pri­etary busi­ness mis­tak­enly sent buy or­ders worth 23.4 bil­lion yuan on Aug 16 to the Shang­hai Stock Ex­change, and fi­nally com­pleted trans­ac­tions of 7.27 bil­lion yuan, which lifted the Shang­hai Com­pos­ite In­dex by 5.96 per­cent in three min­utes.

The com­pany’s four chief de­ci­sion- mak­ers de­cided to short-sell the stock in­dex fu­tures in or­der to hedge risks, be­fore dis­clos­ing the in­for­ma­tion to the pub­lic mar­ket.

Ac­cord­ing to the leader of the in­ves­tiga­tive depart­ment of the CSRC, the trad­ing sys­tem, de­scribed as an in­no­va­tive “high-fre­quency” trad­ing pro­gram, one that makes a large num­ber of trades in a very short time, had been used for fewer than 15 trad­ing days. The bro­ker­age only be­gan de­sign­ing it in June.

Ever­bright’s strate­gic in­vest­ment depart­ment had never been in­cluded in the com­pany’s in­ter­nal risk con­trol sys­tem. The flaws in the tech­nol­ogy were not dis­cov­ered be­cause of in­suf­fi­cient test­ing, the CSRC said.

Huang Wei, the CSRC le­gal depart­ment’s di­rec­tor-gen­eral and chief coun­sel, said on Fri­day that this is an “ex­treme”case sce­nario that had never be­fore oc­curred in China’s eq­uity mar­ket, and it alerted the watch­dog to the need for bet­ter laws and reg­u­la­tions.

“This year, one of our key tasks is to re­search and mod­ify the Se­cu­ri­ties Law and pre­pare to cre­ate a Fu­tures Law,” Huang said.

To date, there has been no law or reg­u­la­tion specif­i­cally deal­ing with high-fre­quency trad­ing.

Huang ex­plained that Ever­bright was not found to have ma­nip­u­lated the mar­ket be­cause there was no ev­i­dence that em­ploy­ees had acted with the in­ten­tion of mak­ing a huge gain through the buy or­ders.

Song Yixin, a lawyer from Shang­hai Xin­wang Wenda Law Firm, sug­gested build­ing a mech­a­nism in stock ex­changes that can im­me­di­ately stop trad­ing when ab­nor­mal signals come out.

He also called on Ever­bright to set up a spe­cial fund that can be used to com­pen­sate in­vestors.

As ear­lier re­ported in the me­dia, ev­ery share­holder who owns Ever­bright’s stock could have lost 4,160 yuan on aver­age on the first day of trad­ing af­ter the in­ci­dent.

Ac­cord­ing to the CSRC, in­vestors who suf­fered losses from the in­ci­dent can sue for com­pen­sa­tion.

“It’s good news for the stock mar­ket, be­cause the CSRC’s quick ac­tion showed its de­ter­mi­na­tion to keep a tight lid on on il­le­gal trad­ing, which can bet­ter pro­tect in­vestors’ in­ter­ests,” said Gui Haom­ing, chief an­a­lyst of the Shenyin Wan­guo Se­cu­ri­ties Co.

Ever­bright Se­cu­ri­ties, a unit of State- owned China Ever­bright Group and the sev­enth­largest bro­ker­age by as­sets, had net in­come of 810 mil­lion yuan in the first half, a 2.2 per­cent de­crease from the same pe­riod of last year.

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