Shares of Chinese brokerages fell after a trading error at Everbright Securities Co. (601788) last week caused the biggest swing in China’s benchmark equity index since 2009, prompting a regulatory probe.
Citic Securities Co. (600030), the country’s largest brokerage by market value, fell 3.2 percent in Shanghai as of 1:04 p.m., poised for the biggest drop since Aug. 8. Second-ranked Haitong Securities Co. (600837) sank 3.7 percent to a three-week low. The Shanghai Composite Index lost 0.2 percent.
The China Securities Regulatory Commission banned Everbright Securities from proprietary trading until Nov. 18 and started an investigation into the brokerage, the watchdog said in a statement yesterday. China’s fifth-largest securities firm reported a mark-to-market trading loss of 194 million yuan ($32 million) and apologized to investors after errors in order-execution systems sparked a 53 percent surge in the Shanghai Composite Index’s trading volumes.
“Brokerages’ proprietary trading may experience a new storm of regulatory tightening,” Zhang Haidong, a Shanghai-based analyst at Tebon Securities Co., wrote in a note today.
Internal controls at Everbright were “obviously flawed” and no human errors were detected, the CSRC said in a statement posted on its website yesterday. Defects in an arbitrage-trading system in Everbright’s strategic investment department generated as many as 26,082 unintended market orders in just two seconds, the company said in its statement yesterday.
The Shanghai Composite jumped on Aug. 16 from a loss of as much as 1 percent to a gain of 5.6 percent in two minutes during the morning session. The gauge closed with a loss of 0.6 percent.
“Smaller brokerages are hit harder than bigger ones today, which are supposed to have better risk control measures,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “The market is lowering expectations about the development of brokerages’ proprietary trading business after the incident.”
Everbright Securities shares have been suspended in Shanghai and will resume trading tomorrow, the company said in a statement to the city’s exchange yesterday. The stock has dropped 14 percent this year.
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