China’s securities regulator has hit Everbright Securities with a record Rmb523m ($85m) fine, banned four senior employees for life and put restrictions on its operations after an investigation revealed insider trading and other illegal activities.
The probe by the Chinese Securities Regulatory Commission was sparked by a trading error at Everbright two weeks ago the broker said was caused by a computer glitch that caused a sudden spike in stock prices in Shanghai.
However, the CSRC discovered that Everbright had illegally profited from the price spike by betting that the Shanghai Composite stock index would fall before unwinding its mistaken trades, according to Xinhua, the official news agency. Everbright short sold the index without informing the market that its mistaken trades were behind the price spike.
The initial trading error was not reported until 2:22pm, more than an hour after Everbright traders started to short the market.
“Before that announcement, Everbright Securities knew the real reason for the market’s unusual movement, while the investing public was not clear on it,” the CSRC said. “Under these circumstances, Everbright Securities should not have engaged in trading and should only have used reasonable behaviour to mitigate risks after publishing its insider information.”
Xu Haoming, president of Everbright Securities since 2005 until he resigned last week, is one of those banned for life from working in the securities and futures markets. Yang Jianbo, global head of markets, who was suspended last week, has also been banned for life, along with Yang Chizhong, an assistant president and party member, according to Bloomberg data, and another employee, Shen Shiguang. Each of the four was also personally fined Rmb600,000, according to Xinhua.
Shortly after 11am on August 16, Everbright traders intended to place a buy order for 24 stocks, with the order set on an automatic repeat function. Because of an error in the computer programme, the order instead bought all the stocks that comprise 24 different exchange traded funds, also on repeat.
This led Everbright to make buy orders worth a total of Rmb68.6bn, of which Rmb7.3bn were actually completed.
That big rush of buy orders triggered a sharp jump in the Chinese stock market before the lunch trading break at 11:30am. When Everbright traders realised the mistake, they decided to profit from it rather than report it. Starting at 1pm when the market reopened after lunch, the traders shorted 6,240 stock index future contracts and also sold 950m exchange traded fund positions on their books.
The index shorts generated a profit of Rmb71.4m for Everbright, while the ETF sales allowed it to avoid losses of Rmb13.1m.
On top of the bans for its employees and the penalties, Everbright is restricted from proprietary trading– betting its own money – for all securities apart from bonds for an indeterminate period. The CSRC also said it would temporarily halt approvals of any new businesses for Everbright, which will limit its ability to expand beyond traditional stock broking, where revenues and profits are in decline.
Additional reporting Emma Dong
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