China Investigates 'Fat Finger' Trade

Confidence in China’s equities took a fresh blow after a “fat finger” trade by a broker sparked wild swings in the market, which analysts say could deter investors further from one of the world’s worst performers this year.

The accidental deluge of buy orders by Everbright Securities on Friday sent the benchmark Shanghai index up 5.6% within minutes before ending the day with a loss, while the midsize broker was suspended from trading and the stock-market regulator started an investigation.
The roller-coaster ride comes just as Chinese stocks were starting to recover after a dismal first half of the year that left them as Asia’s biggest loser this year, down 8.3%. Recent economic data are showing that the world’s second-biggest economy may be stabilizing after a slowdown, while hopes for government economic support have provided a further boost.
Regulators have also been eager to make the notoriously volatile market more stable in recent years by encouraging longer-term investors, in addition to retail investors that are more prone to speculation and sensitive to sudden moves.

The China Securities Regulatory Commission said in a statement Sunday that Friday’s trading glitch was the result of a design defect, rather than human error, in Everbright Securities’ transaction system.

Everbright Securities said in a statement to the Shanghai Stock Exchange on Friday there were problems in the arbitrage system of its proprietary trading and it is conducting an internal investigation. The company didn’t return calls for comment.

The regulatory commission said the surge of orders came from an automated account in Everbright Securities Co. It said it had suspended the broker’s proprietary trading business in question and would begin an official inquiry into the broker.
The commission couldn’t be reached for comment Sunday.
The error resulted in inflated transactions totaling 23.4 billion yuan ($3.8 billion), while the actual transactions totaled 7.27 billion yuan, the CSRC said. It didn’t make clear how the errant trades would be rectified.

In coincidental activity on Friday, a subsidiary of Everbright Securities placed a large number of short positions on stock futures, just as other traders were left puzzled with the buy activity. A short position benefits from shares falling.

According to data from the China Financial Futures Exchange, Everbright Futures Co. increased its short positions in the benchmark September stock-index futures contract by 7,023 lots on Friday, worth about 4.82 billion yuan, according to Wall Street Journal calculations. That made Everbright Futures the top short seller on the day, far ahead of runner up Huatai Great Wall Futures Co.’s increase of 1,018 short position in the September contract.
Everbright Futures couldn’t be reached for comment.
“After this incident, the securities regulator may launch a fresh crackdown on risks and irregularities,” Huang Cengdong, an analyst at Sinolink Securities, said in a research note. “This will scale back market expectations for the pace of innovation in the brokerage sector.”

So-called fat-finger trades have in the past caused havoc on the world’s exchanges. Most notably in the May 2010 “flash crash,” the Dow Jones Industrial Average lost nearly 1,000 points within minutes. In August 2012, glitches at Knight Capital Group Inc. led to wild price swings in dozens of stocks, and resulted in a $440 million loss for the brokerage.
The Shanghai Stock Exchange said the operation of its trading system was normal Friday, with the index ending down 0.6%.

Some of China’s biggest companies were caught up in Friday’s volatility. China’s largest oil refiner, China Petroleum & Chemical Corp., briefly hit its 10% upper trading limit.
—Amy Licontributed to this article.
Write to Shen Hong at hong.shen@dowjones.com

Continued here: China Investigates ‘Fat Finger’ Trade