UBS Unit Among China Brokers Facing Penalties

The Shanghai Stock Exchange will take measures against brokerages including a UBS AG unit and China International Capital Corp. for sell orders that caused stocks to plunge on Dec. 20, a bourse official said.

UBS Securities Co., CICC, Guotai Junan Securities Co. and Orient Securities Co. face penalties for failing to exercise professional judgment and diligently review orders in the last minutes of trading from Qualified Foreign Institutional Investor accounts controlled by UBS, Citigroup Inc., HSBC Holdings Plc and Martin Currie Investment Management Ltd., the Shanghai Securities News reported today. The exchange official, who asked not to be identified because of the bourse’s rules, said steps were planned and confirmed the accuracy of the newspaper’s report, without commenting further.

The trades show how orders near the end of a daily session can cause volatility in Shanghai, one of two markets among the world’s 10 largest that don’t use an auction to set closing prices. China Construction Bank Corp. and other stocks plunged as the funds tried to trade as close as possible to the close, the newspaper said. The opacity of the market may have made the moves bigger, said BOC International China Ltd.’s Zhang Jian.

“The regulator needs to do more about improving transparency,” said Zhang, a Beijing-based analyst who covers brokerage stocks. “This is just part of the process as the market matures.”

‘Disruptive’ Trades

The China Securities Regulatory Commission said in a Dec. 27 statement about the drop that executing large transactions that significantly deviate from market prices was “disruptive.”

Spokesmen for CICC, Citigroup, HSBC and UBS declined to comment. Guotai Junan and Martin Currie didn’t immediately reply to e-mails seeking comment, and phone calls to Orient Securities went unanswered.

Exchanges in most countries use auctions to set closing prices by pooling share orders and finding the level at which the most can be matched. That may reduce volatility and limit manipulation, according to a 2006 paper tracking the introduction of the process at Singapore’s stock exchange.

Hong Kong Exchanges & Clearing Ltd., the other operator among the 10 biggest by domestic market capitalization that doesn’t use an auction, said in January it plans to reinstate the procedure. The exchange now uses the median price from the final five transactions in a stock to calculate its closing level.

— With assistance by Shidong Zhang, and Aipeng Soo

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