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Shares in China Everbright Securities dropped by their 10 per cent limit on Monday after the brokerage was fined Rmb523 million ($85.5 million) for erroneous trades last month that caused a stock market jump.
The Shanghai-based firm on Monday said it had received the notices from the China Securities Regulatory Commission (CSRC), the country’s securities watchdog, about the fine and would comply.
As well as the fine, four of Everbright Securities’ executives were banned from the industry for life and the firm was ordered to cease all proprietary trading activities (excluding fixed-income business). The CSRC has also suspended approvals of the company’s new businesses.
The four executives, including then-president Xu Haoming and Yang Jianbo, head of Everbright's Strategic Investment Division, will be fined a combined Rmb2.4 million and banned from working in the industry for life. Xu and Yang Chizhong, another one of the four executives, resigned following the errors, according to the brokerage.
Meanwhile, Mei Jian, the company’s board secretary, was fined Rmb200,000 for sending out misleading information in connection with the errors and had also resigned, the company said on Monday.
On August 16, the Shanghai Composite Index jumped about 6% in two minutes in morning trading. In the afternoon, Everbright Securities and the CSRC said that an error in the company’s trading system caused unintentional buy orders worth Rmb23.4 billion, which led to the index surge.
Of those orders, Rmb7.3 billion worth of trades had been successfully executed. The Shanghai index closed down 0.64% on the same day.
The CSRC criticised Everbright for risk hedging following the mistake, through a sale of Rmb1.85 billion worth of stocks as exchange-traded funds (ETF) and short-sold 7,130 futures contracts.
This hedging constituted “a number of legal and regulatory violations,” including insider trading, misleading information distribution as well as violation to rules of compliance for securities firms, according to the regulator.
CSRC said it wanted to punish Everbright harshly as a way of warning the securities and futures industry about proper internal management.
The error, the first such mistake caused by a trading system flaw in Chinese stock market history, is a hit to CSRC’s long-time efforts to restore investor confidence in the stock market.
China’s A-share market has been dented by disappointing share price performance, as well as poor financial results and IPO issuers’ corporate scandals after listings. The Shanghai composite index has already declined over 10% since this year.
Xinhua News Agency, Beijing’s official news service, in a commentary about CSRC’s fine, said investors would not play the stock market if the punishment was not heavy enough to make an example and repair the market order.
The CSRC has suspended IPOs for almost a year in an attempt to clear up the markets. It has also asked investment banks and issuers to conduct due diligence and financial self-review to better police rule problem companies.
However, the markets are still fragile. “I am surprised to find that a mere Rmb7.3 billion can drive such a big market to surge 6%,” said a Shanghai-based equity trader with a middle-sized brokerage. “Retail investors must have followed and put their money in,” said the trader.
The CSRC reminded retail investors who suffered losses from the “fat finger” event can take the brokerage to court and demand compensation.
Some banking sources and analysts have expressed their concern that innovative businesses will be suspended due to the Everbright glitch. Innovative businesses, including securitisation and leverage trading, have been targeted by brokerages as new sources of income.
The CSRC on Friday appealed that the securities industry should control risks in the new forms of trading, quantitative trading and IT systems. It said it is speeding up in improving regulations and related rules.
Treasury bond futures will officially launch on September 6, confirmed by the CSRC.
