State-controlled Chinese brokerage Everbright Securities Co. (601788) reported a trading loss of 194 million yuan ($31.7 million) and apologized to investors after errors in order-execution systems sparked the biggest intraday swing in China’s benchmark index since 2009.
Everbright said the Aug. 16 incident “brings negative impact to the company’s brand reputation and market image,” according to a statement submitted to the Shanghai Stock Exchange today. Everbright may face regulatory penalties that could affect its business development and results, it said.
“The final loss cause to the company and influence on the company’s financial status may change,” Everbright said. “We feel deeply disturbed, and with a heavy heart, we would like to deliver our most sincere apology to investors.”
The incident, which touched off a 53 percent surge in trading volumes in he Shanghai Composite Index (SHCOMP), echoed the May 2010 “flash crash” in which the Dow Jones Industrial Average fell almost 1,000 points before rebounding. Internal controls at Everbright were “obviously flawed” and no human errors were detected, the China Securities Regulatory Commission said in a statement posted on its website today.
Everbright detected order-generation and execution defects in an arbitrage-trading system in the company’s strategic investment department, the company said in its statement today.
The company held a news conference tonight that was only open to invited journalists. At the briefing, Everbright said it will deal with “spot goods and stocks” and will communicate with the exchange about details, 21st Century Business Herald reported on its website.
Everbright’s trading system placed an accumulated 23.4 billion yuan of buy orders, of which 7.27 billion yuan was transacted. The brokerage sold 1.85 billion yuan in exchange-traded funds, along with short-selling 7,130 contracts of index futures, according to the statement on the CSRC website.
The Shanghai Composite Index jumped from a loss of as much as 1 percent to a gain of 5.6 percent in two minutes during the morning session, as 16 of the measure’s 20 biggest companies by weighting increased by the 10 percent daily limit. The gauge closed with a loss of 0.6 percent.
The securities regulator said today all stock market trading on Aug. 16 was effective, and its Shanghai branch has suspended the company’s relevant businesses. The stock has declined 14 percent this year, surpassing the 8.8 percent fall in the equity benchmark.
The brokerage’s profit has declined for three straight years, with net income falling 35 percent to 1 billion yuan last year, according to a March exchange filing. It is scheduled to report first-half earnings on Aug. 22.
Everbright Securities in June said it’s being investigated by China’s securities regulator for its work on Henan Tianfon Energy-Saving Panel Science & Technology Co.’s proposed initial public offering. The market watchdog has also frozen approvals for IPOs for more than 10 months amid a crackdown on fraud and misconduct by companies and bankers, and has said it won’t allow listings to resume until the CSRC introduces new rules.
The brokerage’s plan to raise as much as 8 billion yuan from a private placement of its shares was also blocked by the securities regulator last month after it started investigating the firm.
China Everbright Group and its Hong Kong-listed unit, China Everbright Ltd., hold 67 percent of Shanghai-based Everbright Securities. Everbright Ltd. (165) fell 5.5 percent, the biggest drop in more than a year, to close at HK$11.04 in Hong Kong trading.
The closely held parent group, led by Chairman Tang Shuangning and supervised by China’s State Council, has businesses spanning from banking, broking, insurance, futures and asset management to hotels, tourism and property development. Established in 1983, it had 2.4 trillion yuan of assets and almost 50,000 employees at the end of last year, according to its website.
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