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Everbright Proprietary Trading Head Suspended on Order Error (5)

August 21, 2013

Everbright’s Proprietary Trading Head Suspended on Order Error

The logo for China Everbright Group is worked on at one of the company's offices in Beijing. Photographer: Nelson Ching/Bloomberg

Everbright Securities Co. (601788) suspended its head of proprietary trading after an error sparked the wildest Chinese stock swings in four years and prompted a regulatory probe. The stock slumped to a six-week low.

Yang Jianbo, who oversees trading of Everbright’s own money as head of global markets, said by phone today he is assisting the investigation into the Aug. 16 incident. He was the only one of about 20 proprietary traders who was suspended, Yang said five days after the strategic investment unit he ran made 23.4 billion yuan ($3.82 billion) of erroneous buy orders.

The mistake, described by the China Securities Regulatory Commission as the first of its kind in the nation, preceded a programming error at Goldman Sachs Group Inc. (GS:US) that caused unintended stock-option orders to flood American exchanges yesterday. Everbright drew a three-month ban on proprietary trading from the CSRC and announced a loss of 194 million yuan for its order misstep.

“It is hard to determine the bottom for Everbright’s stock because we can’t really ascertain in the immediate term the actual impact of the incident on its earnings,” Song Jian, Beijing-based analyst of China Minzu Securities Co., said by phone today. She’s intending to cut her add recommendation on the stock in coming days.

The company’s shares slumped 5.9 percent at the end of Shanghai trading, its lowest level since July 9, after plunging by the 10 percent daily limit yesterday. The firm’s market value has fallen by about 6 billion yuan in the past two days, data compiled by Bloomberg show.

Debt Underwriting

Everbright was suspended from underwriting debt sold by non-financial institutions on the nation’s interbank market, the broker said in a statement to the Shanghai stock exchange. Since the business started in November 2012 it had brought in revenue of 540,000 yuan, the company said.

The National Association of Financial Market Institutional Investors asked Everbright to review and rectify its systems after the bad trades exposed “major problems” in internal controls, according to the statement. Everbright must submit a report to the association by Aug. 30.

Everbright’s mark-to-market loss of 194 million yuan was based on Aug. 16 closing prices and may change, it said on Aug. 18. The final trading loss could reach 400 million yuan, Paddy Ran, a Citigroup Inc. analyst, wrote in an Aug. 16 note.

Company Apology

The brokerage apologized in a statement three days ago and said it faced regulatory penalties after the trading error spurred a swing of more than 6 percentage points in the Shanghai Composite Index. The company said Aug. 19 it mispriced a 10 million yuan government bond transaction, a trade that wasn’t settled following negotiations with its counterparty.

Everbright Securities’ 3.95 percent bonds due next month and sold to investors at par in May were yielding 5.089 percent yesterday, indicative pricing from Chinabond on Bloomberg show. That’s the highest level since July 2.

China Chengxin International Credit Rating Co., an affiliate of Moody’s Investors Service, said in an Aug. 19 statement it put Everbright on its credit watch list. The trading error and investigation may affect Everbright’s main credit rating and its ability to pay back debt in the short term, Chengxin said.

Yang’s suspension was reported earlier by the Shanghai Securities News. Yang led a study three months ago into the risk control and management of equity derivatives, which was listed as a key 2013 research subject by the China Securities Association, the newspaper reported.

Structured Products

Educated at the Shanghai University of Finance and Economics and the University of Manchester, Yang joined Everbright Securities in 2004, according to a brochure of an event sponsored by Societe Generale (GLE) and Everbright Securities in 2008. In 2006, Yang was made responsible for the development of a platform for structured products, the brochure said.

It was a “management decision” to suspend Yang, Everbright Securities Board Secretary Mei Jian wrote in a text message. “After all, the business that had problems was in the department he managed.”

Stock Slump

Brokerages should make risk control a priority as they pursue new businesses, the China Securities Journal quoted CSRC Assistant Chairman Zhang Yujun as saying during an Aug. 6 visit to a securities firm. The ultimate goal of developing new businesses is to support the real economy, Zhang was quoted as saying.

The missteps threaten to erode confidence in China’s stock market, where the benchmark index has slumped 29 percent in the four years to yesterday. The drop by the Shanghai Composite Index (SHCOMP) is the second biggest over the past four years among equity gauges in 45 emerging and developed countries, after a 63 percent slide in Greece’s ASE Index.

Haitong Securities Co. (6837), China’s second-largest brokerage by market value, today denied a report that its trading system suffered a technical glitch yesterday morning. The company’s Hong Kong shares added 0.8 percent after sliding 5.5 percent yesterday. Its Shanghai stock gained 0.9 percent.

Haitong Denial

Some investors weren’t able to sell stock in Sinopec Shanghai Petrochemical Co. and Sinopec Yizheng Chemical Fibre Co. through Haitong’s system due to outdated data, state-run China.com.cn reported yesterday, citing unidentified people.

“Everything has been normal,” Shu Yunyun, a Haitong spokeswoman, said by phone today. “The situation reported by media didn’t happen.”

Everbright mishap comes at a time of increased scrutiny of electronic trading systems by regulators around the world. About a year ago, Knight Capital Group Inc. computers flooded U.S. equity markets with erroneous orders, a mistake that almost put the market-making firm out of business.

Goldman Sachs is working with U.S. exchanges to resolve yesterday’s faulty options trades, spokesman David Wells said in an e-mail. At least three operators of U.S. options exchanges are reviewing trades that took place at the beginning of the day and NYSE Amex Options said most of the transactions may be canceled.

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net; Jun Luo in Shanghai at jluo6@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net


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