China’s securities regulator imposed a record penalty on Everbright Securities Co. (601788) after finding the state-controlled broker engaged in insider trading as it roiled the nation’s equity markets with errant trades two weeks ago.
Fines and the confiscation of illicit gains will total 523 million yuan ($85 million), the China Securities Regulatory Commission said in a statement on its website yesterday. Four people including ex-President Xu Haoming will be banned from markets for life and the brokerage was barred from most proprietary trading, it said.
The CSRC had initially barred Everbright from trading using its own money for three months after erroneous buy orders on Aug. 16 sparked the biggest swing in China’s benchmark equity index since 2009. The misstep, combined with glitches this month at Goldman Sachs Group Inc. and in the Nasdaq Stock Market, has fueled concern that electronic trading systems are unreliable.
“The penalty is quite a harsh one, as the Everbright error had a huge impact on the market,” Wei Tao, a Beijing-based analyst at China Securities Co., said by phone yesterday. “With the CSRC saying this is an insider trading incident instead of just a trading error, this will put downward pressure on the shares of Everbright Securities, at least in the near term.”
Everbright committed insider trading by selling exchange-traded funds and index futures before telling the market it had made erroneous trades, the CSRC said.
Mei Jian, Everbright’s board secretary, declined to immediately comment when reached on his mobile phone. Two more calls went unanswered.
Everbright’s former President Xu resigned and the brokerage suspended Yang Jianbo, the head of its proprietary trading business, last week. The firm estimated it lost 194 million yuan on the trades, based on Aug. 16 closing prices, and said the figure may change.
Xu, Yang and the two other employees responsible for the incident will each be fined 600,000 yuan as well as being barred from securities market for life, the CSRC said in its statement. Board Secretary Mei was fined 200,000 yuan, according to the statement.
The brokerage’s proprietary trading business, excluding fixed income, will be halted and the CSRC will also suspend reviews of any new businesses for Everbright, the regulator said.
The watchdog said the abnormal trading on Aug. 16 involved insider trading, misleading information and the violation of internal risk-management guidelines, according to the regulator.
“The punishment sends a signal to the market that the CSRC will not tolerate irregularities,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research, said by phone yesterday. “This is a long process: The system risk won’t be removed just because of the Everbright incident or just by getting one brokerage to behave.”
The value of equities, securities and derivatives held by Everbright’s proprietary trading desk relative to net capital exceeded the regulatory limit of 100 percent after the incident, Everbright said on Aug. 18.
The firm was barred by the China Financial Futures Exchange from creating new stock-index futures positions as of Aug. 19 and was suspended from underwriting debt sold by non-financial institutions on the nation’s interbank market.
The watchdog’s investigation into the erroneous trades was its second probe of Everbright this year. The CSRC in June began scrutinizing the brokerage in relation to Henan Tianfon Energy-Saving Panel Science & Technology Co.’s initial share sale application, which the regulator said contained falsified information. The CSRC said July 19 it had concluded field investigation work and passed the case to its administrative penalties commission.
In May, the regulator imposed a penalty of 76.7 million yuan on Ping An Securities Co. in fines and confiscated revenue for advising on Wanfu Biotechnology Hunan Agricultural Development Co.’s IPO. Wanfu was fined 300,000 yuan for its share sale, which the CSRC deemed fraudulent.
Computer malfunctions caused Nasdaq, the second-biggest American market operator, to halt transactions in all of its shares for more than three hours on Aug. 22. Errors in the feed used to disseminate quotes and prices were to blame, said Nasdaq, which is home to 3,200 companies from 37 countries.
The Nasdaq halt came two days after a Goldman Sachs computer malfunctioned, bombarding options markets with erroneous orders. Options officials at Nasdaq as well as NYSE Amex and CBOE Holdings Inc. (CBOE:US) spent almost a day reviewing orders for cancellation.
Everbright Securities is controlled by its closely held parent, China Everbright Group, which has businesses from banking, insurance and asset management to tourism and property development. The stock has fallen 29 percent this year, compared with the Shanghai Composite Index’s 7.6 percent drop.
To contact Bloomberg News staff for this story: Stephanie Tong in Hong Kong at firstname.lastname@example.org; Aipeng Soo in Beijing at email@example.com
To contact the editor responsible for this story: Chitra Somayaji at firstname.lastname@example.org