China vets brokerages' computer systems after $3.8 billion buy error

Thu Aug 22, 2013 3:52am EDT
 
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By Matthew Miller and Gabriel Wildau

BEIJING/SHANGHAI (Reuters) - China's more than 110 brokerages will come under government scrutiny after Everbright Securities mistakenly made 23.4 billion yuan ($3.82 billion) of buy orders, collectively the biggest erroneous trade in Chinese stock market history.

The China Securities Regulatory Commission (CSRC) decided to widen its investigation of stock trading systems to all brokerages following its probe into a small Shanghai-based company that made the high-frequency trading software used by Everbright, a CSRC spokesman said.

The CSRC is trying to determine whether design flaws in the trading platform made by Shanghai Mercrtsoft Technology Co were responsible for Everbright's trading glitch on August 16. The malfunction caused the brokerage to place a series of mistaken trades that totaled 23.4 billion yuan ($3.82 billion), spurring a massive swing in Shanghai stock prices. Everbright has since replaced its president.

Everbright's trading error exposed shortcomings in China's trading systems and their oversight, industry experts say. It has prompted local securities firms to review their existing practices and may result in greater regulatory supervision.

"The 'Mercrtsoft High-Frequency Trading and Investment System' that Everbright used was a customized system currently used exclusively by Everbright," the CSRC spokesman said in a question-and-answer transcript posted to the regulator's website late on Wednesday.

But he said the CSRC is also conducting inspections of systems in use at other brokerages.

Shanghai-based Everbright said a problem with its order execution system sent 26,082 erroneous buy orders directly to the Shanghai Stock Exchange last Friday morning over a two-minute period.

That sparked a flash rally that created and then wiped out roughly $100 billion worth of share value on the CSI300 Index in the course of a single day, Reuters calculations show. The CSI300 tracks the largest listed firms in China.   Continued...

 
A department office of Everbright Securities is pictured in Beijing, August 16, 2013. REUTERS/Jason Lee