Everbright Gets China Proprietary Trading Ban After Error

Everbright Securities Co.’s woes worsened after erroneous trades that sparked the wildest Chinese stock swings in four years as the firm was banned from proprietary trading and said it today mispriced a bond sale.

State-controlled Everbright said yesterday it placed 23.4 billion yuan ($3.8 billion) of incorrect buy orders on Aug. 16, prompting the three-month ban and an investigation by the China Securities Regulatory Commission. The company gave the wrong price for 10 million yuan of government bonds today, it said on its website.

The ban is a further setback to a brokerage already contending with falling profits and a CSRC probe into an initial public offering that Everbright worked on, which forced it to delay a $1.3 billion sale of its own shares. The Shanghai Composite Index jumped from a loss of as much as 1 percent to a gain of 5.6 percent in two minutes on Aug. 16 after the erroneous orders, before erasing the gain.

“The consequences for Everbright Securities could be huge,” Song Jian, a Beijing-based analyst at China Minzu Securities Co., said by phone. “This is a serious issue. This may also lead to the cleansing of the internal risk management systems at Chinese brokerages as part of the government’s effort in strengthening risk control.”

China’s stock market was roiled on Aug. 16 by a 53 percent surge in trading volumes that sent the Shanghai Composite Index to its biggest intraday gain since March 2009.

Buy Orders

Of the 23.4 billion yuan of buy orders, 7.27 billion yuan were transacted, the company said. Everbright had a mark-to-market loss of about 194 million yuan based on Aug. 16 closing prices, and the final value may change, the company said in a statement to the Shanghai exchange yesterday.

The final trading loss could reach 300 million to 400 million yuan, Citigroup Inc. analyst Paddy Ran wrote in a note dated Aug. 16.

Everbright Securities was China’s 12th-largest brokerage by revenue last year, data from the Securities Association of China show. China Everbright Group, the broker’s closely held parent, is led by Chairman Tang Shuangning and supervised by China’s State Council, with businesses spanning from banking, insurance and asset management to tourism and property development.

Set up in 1983, the group had 2.4 trillion yuan of assets and almost 50,000 employees at the end of last year, according to its website.

Bond Transaction

In today’s incident, Everbright Securities sold 10 million yuan of government bonds at a yield of 4.2 percent, 25 basis points higher than the valuation on the previous trading day, the brokerage said. The counterparty agreed not to settle the deal, the company said.

The CSRC didn’t reply to a faxed inquiry about whether it would include the bond transaction in its probe. Everbright Securities has also been barred from creating new stock-index futures positions starting today, the China Financial Futures Exchange said in a statement.

Everbright Securities shares are suspended in Shanghai trading until tomorrow. The stock has dropped 14 percent this year, lagging behind an 8.1 percent decline in the Shanghai Composite.

Company Apology

Everbright Securities apologized and said the incident “brings negative impact to the company’s brand reputation and market image,” according to yesterday’s statement. It said it may face regulatory penalties.

Everbright Securities’ proprietary trading revenue rose 77 percent to 165 million yuan last year, according to the broker’s annual report. The company posted net income of 1 billion yuan on revenue of 3.6 billion yuan in 2012.

Disruptions in electronic markets have been under scrutiny since a May 2010 incident in which the Dow Jones Industrial Average fell almost 1,000 points in minutes before rebounding. Separately, Knight Capital Group Inc. lost more than $450 million after sending erroneous orders to U.S. exchanges on Aug. 1, 2012, because of a computer malfunction. Knight was later bought by Getco LLC to create KCG Holdings Inc.

“I haven’t seen this kind of error in at least the past 10 years,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group, said by telephone last week. “This is an extraordinarily big loophole, which doesn’t just show defects in Everbright, but also the A-share market.”

In addition to the buy orders, the brokerage sold 1.85 billion yuan in exchange-traded funds, along with short-selling 7,130 contracts of index futures, according to the statement on the CSRC website. Everbright Securities won’t sell the mistakenly purchased shares immediately, it said today.

Profit Decline

The brokerage’s profit has declined for three straight years as stock trading and underwriting businesses shrank amid a slump in the world’s second-worst performing stock market. Equity trading in Shanghai and Shenzhen fell 25 percent in 2012 and funds raised from domestic share sales decreased 64 percent, Everbright Securities said in its 2012 annual report.

Net income fell 35 percent to 1 billion yuan last year, according to a March exchange filing. The company is scheduled to report first-half earnings on Aug. 22.

Everbright Securities in June said it’s being investigated by China’s securities regulator for its work on Henan Tianfon Energy-Saving Panel Science & Technology Co.’s proposed IPO. The market watchdog has also frozen approvals for IPOs for more than 10 months amid a crackdown on fraud and misconduct by companies and bankers, and has said it won’t allow listings to resume until new rules are introduced.

Underwriting Revenue

Underwriting new stock offerings accounted for about 70 percent of Chinese brokerages’ investment-banking revenue from 2009 through 2011, according to Shenyin & Wanguo Securities Co.

Everbright Securities’ plan to raise as much as 8 billion yuan from a private placement of its shares was also blocked by the regulator last month after it started investigating the Henan Tianfon IPO.

China Everbright Group and its Hong Kong-listed unit, China Everbright Ltd., hold 67 percent of Shanghai-based Everbright Securities. Everbright Ltd. rose 0.2 percent to HK$11.06 at the close in Hong Kong today, after tumbling 5.5 percent on Aug. 16.

— With assistance by Aipeng Soo

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