China’s market regulator yesterday fined Everbright Securities a record 523.3 million yuan (US$85 million) and banned four executives from the industry for life for a trading error that rocked its stock market earlier this month.
The penalty levied on the brokerage is the largest ever issued by the China Securities Regulatory Commission.
A “design defect” in Everbright’s proprietary trading system briefly sent the Shanghai benchmark stock index soaring more than 5 percent on August 16.
The CSRC found the brokerage committed a number of legal and regulatory violations, including insider trading, as a result of the incident.
The watchdog confiscated the 87.21 million yuan illegal profits the company made from hedge trades. The record fine was five times the profits it made from the unfair transactions, the commission said at a media briefing after the market closed yesterday.
A glitch in Everbright’s system for proprietary trading triggered a deluge of orders that caused a wild movement in the Shanghai stock market on August 16, with the key composite index rocketing up to 5.9 percent in two minutes. Everbright went on to sell 1.85 billion yuan of shares through exchange-traded funds and opened 7,130 lots of short positions in the stock-index future market.
The CSRC said there was no market manipulation because the crisis was caused by design flaws in the trading system, but Everbright was charged with insider trading because hedge trades were made before it disclosed the trading glitch to the public.
The CSRC also barred Everbright from proprietary business without specifying when the ban will be lifted, and suspended approval of new businesses for the brokerage.
“The abnormal trade by Everbright, the first of its kind since the establishment of China’s capital market, is an extreme incident that had significant negative impact on the market,” the CSRC said.
Xu Haoming, who resigned as the company’s president and director after the trading glitch, was fined 600,000 yuan and was banned for life from holding any positions in the securities market, the CSRC said.
Three other senior executives, including Yang Jianbo, who was in charge of Everbright’s strategic investment department, were also banned from the securities and future markets for life.
Mei Jian, secretary to the Everbright’s board of directors, was fined 200,000 yuan for misleading investors by denying that a fat-finger trade had occurred.
Market watchers said the record penalty indicated the regulator’s efforts to crack down on market irregularities, and hoped it would improve market environment.
“The severe punishment is a warning to the brokerage industry and would prompt securities firms to be cautious in their business dealings, while strengthening their risk control mechanism,” said Zhang Qi, an analyst with Haitong Securities.
The CSRC also said investors who had suffered losses can file lawsuits and claim compensation from the brokerage. But Zang Xiaoli of Beijing-based Yingke Law Firm said it would be difficult for investors to claim any compensation because of the imperfect legal system.
China Financial Futures Exchange has barred Everbright from opening new stock-index futures positions and the National Association of Financial Market Institutional Investors, a watchdog of China’s inter-bank market, has also banned Everbright from underwriting for bond financing of non-financial companies.
Everbright shares have slumped 11.7 percent since the trading glitch and a total of 7 billion yuan has been wiped out from the brokerage’s market capitalization.