Shanghai Exchange Mulls Circuit Breaker After Everbright Error

The Shanghai Stock Exchange is considering setting up a circuit-breaking mechanism as part of efforts to avoid a repeat of a trading error on Aug. 16 that triggered the biggest swing in its benchmark index since 2009.

The exchange will also study the possibility of allowing the cancellation of trades during incidents similar to the erroneous buy orders made by Everbright Securities Co., an unidentified spokesman from the stock exchange said yesterday in comments on its Weibo, Sina Corp.’s Twitter-like microblogging platform.

Everbright’s 23.4 billion yuan ($3.4 billion) of erroneous buy orders caused the biggest swing in the Shanghai Composite Index since 2009, threatening to further erode confidence in a market that’s tumbled about 40 percent in the past four years. The China Securities Regulatory Commission banned the firm from proprietary trading for three months and pledged to examine risks in brokerages’ trading systems to prevent such an error from happening again.

The exchange is also looking into allowing a “T+0” trading mechanism for the spot market, which allows investors to buy and sell the same stock on the same day, to protect the rights of small investors, according to the spokesman.

China currently operates a “T+1” trading mechanism in the spot market, which is dominated by retail investors, and a “T+0” mechanism in the futures market that is traded mostly by institutional investors.

Hedging Risk

Under the current system, most individual investors are unable to minimize their losses in the event of a big decline in the benchmark index by selling the stocks that they bought on the same day, while large institutional investors are able to mitigate their risk by hedging their positions on the futures market, according to the spokesman.

The exchange will also supervise Everbright’s related trading accounts to make sure the company fulfills its pledge not to sell the stocks bought in the Aug. 16 incident before it announces a plan to deal with the securities, the spokesman said.

Everbright announced President Xu Haoming’s resignation after suspending Yang Jianbo, who oversees the firm’s proprietary trading as head of global markets.

The firm estimated that it lost 194 million yuan on the trades, based on Aug. 16 closing prices, and said the figure may change. The final trading loss could reach 400 million yuan, according to Paddy Ran, an analyst at Citigroup Inc. in Hong Kong.

Everbright’s A-shares traded in Shanghai fell 1.4 percent to 9.84 yuan on Aug. 23, the lowest close since June 25. The stock, which was suspended on Aug. 16 after the error, has dropped 19 percent since trading resumed on Aug. 20.