Everbright Securities Co. (601788) plunged in Shanghai as the broker faces possible fines and more restrictions on business after an unprecedented stock trading error that threatens to erode confidence in China’s market.
The shares fell by the 10 percent daily limit to 10.91 yuan at the close today, with trading volumes about 68 percent below this month’s average. Haitong Securities Co. (600837) sank the most in three weeks as its board secretary said the company was looking into media reports about a trading problem.
State-controlled Everbright had been suspended since it made 23.4 billion yuan ($3.8 billion) of erroneous buy orders on Aug. 16, an event the China Securities Regulatory Commission described as the first of its kind. The company mispriced 10 million yuan of government bonds yesterday. The CSRC banned Everbright from proprietary trading for three months as the regulator seeks to lure investors back to the world’s second-worst performing stock market in the past four years.
“It wouldn’t be surprising, as market participants and investors eagerly await, if the regulators hand down a harsh penalty and hefty fines to ensure that similar incidents will not happen again,” said Hubert Tse, a Shanghai-based partner at the law firm Boss & Young who’s not involved in the case. “The CSRC is likely to come to a decision fairly soon, probably in weeks.”
The bad trades prompted the regulator’s second investigation of Everbright this year, following a probe of an initial public offering that the firm worked on. The CSRC hasn’t said when it will finish its investigation, or what further penalties it could impose. It didn’t respond to phone and fax requests for comment on whether it will include the bond trade in its investigation of the stock purchases.
“The company is capable of solving liquidity issues,” Everbright’s Board Secretary Mei Jian said by phone, without commenting on the timing or potential penalties in the investigation. “We have normal operations and other financing channels, such as short-term loans on the interbank market.”
Everbright, China’s 12th-largest brokerage by revenue, has been ordered to determine responsibility and to take corrective measures, the CSRC said in a statement on Aug. 18. The securities industry should be on “high alert” because of the flaws exposed by the Everbright case, it said.
Haitong Securities’ information department is looking into media reports of a trading system problem, Jin Xiaobin, board secretary of China’s 2nd-largest brokerage, said by phone today. The stock slumped 3.3 percent, the most since July 29, in Shanghai. The firm’s Hong Kong shares slumped 5.7 percent.
Everbright isn’t the first state-controlled Chinese company to face regulatory scrutiny for its trading operations. Citic Pacific Ltd. reported a currency-derivative loss of about HK$15 billion ($1.9 billion) in October 2008, the biggest by a Chinese company, prompting the resignation of Chairman Larry Yung and a bailout from state-owned parent Citic Group.
China Aviation Oil (Singapore) Corp.’s former head Chen Jiulin in 2006 was sentenced to four years and three months in a Singaporean prison after a $550 million trading loss that prompted the company to seek protection from creditors.
Trading errors may erode confidence in a stock market where the benchmark index has slumped 25 percent in the four years to yesterday. The drop by the Shanghai Composite Index (SHCOMP) is the second biggest among equity gauges in 45 emerging and developed countries, after a 61 percent slide in Greece’s ASE Index.
Trading in Everbright shares dried up after an initial surge in volumes at the open, suggesting investors aren’t eager to purchase the stock at today’s lower valuation. About 4.5 million shares changed hands at the close in Shanghai, 68 percent below this month’s daily average, data compiled by Bloomberg show.
“Investors are scared about touching the stock given all the noise of the last few days,” said Gerry Alfonso, a trader at Shenyin & Wanguo Securities Co. “After the prop trading ban ends, the sentiment could start to change.”
Of Everbright’s 23.4 billion yuan of buy orders, 7.27 billion yuan were transacted, the company said. Everbright had a mark-to-market loss of about 194 million yuan based on Aug. 16 closing prices, and the final value may change, the company said in a statement to the Shanghai exchange on Aug. 18.
Everbright’s final trading loss could reach 300 million to 400 million yuan, Citigroup Inc. analyst Paddy Ran wrote in a note dated Aug. 16.
“It’s difficult to see the endgame other than a tightening of the scope of proprietary activity for the brokers,” Howard Wang, who oversees $10 billion as head of Greater China investments at JPMorgan Asset Management in Hong Kong, wrote in an e-mail yesterday. “More regulation is a definite at this point.”
Everbright Securities said yesterday it sold 10 million yuan of government bonds at a yield of 4.2 percent, 25 basis points higher than the valuation on the previous trading day. The trade won’t be settled following negotiations with the counterparty, the brokerage said in a statement posted late yesterday on its website.
Disruptions in electronic markets have been under scrutiny since a May 2010 incident in which the Dow Jones Industrial Average fell almost 1,000 points in minutes before rebounding. Separately, Knight Capital Group Inc. lost more than $450 million after sending erroneous orders to U.S. exchanges on Aug. 1, 2012, because of a computer malfunction. Knight was later bought by Getco LLC to create KCG Holdings Inc.
Everbright Securities is part of China Everbright Group, a company supervised by China’s State Council, with businesses spanning from banking and insurance to tourism and property development. The group had 2.4 trillion yuan of assets and almost 50,000 employees at the end of last year, according to its website.
--Aipeng Soo, Jun Luo. With assistance from Stephanie Tong, Cathy Chan, Weiyi Lim and Shidong Zhang. Editors: Darren Boey, Nathaniel Espino
To contact Bloomberg News staff for this story: Nathaniel Espino in Beijing at firstname.lastname@example.org
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