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UPDATE 3-Everbright Sec to sell assets after trading fluke sparks funding concerns
08/19/2013 Email this story  |  Printable Version

* Accidental buy orders lifted Shanghai Composite, CSI300 Index on Friday

* Everbright forced to build huge short positions in index futures markets

* Incident comes at a time when China trying to revive investor confidence (Adds mistaken bond trade on Monday morning)

By Lu Jianxin and Kazunori Takada

SHANGHAI, Aug 19 (Reuters) - China's Everbright Securities will sell some of its securities holdings to help cope with a possible funding crunch after a glitch in the brokerage's trading system led to its accidental purchase of more than $1 billion of mainland shares.

The China Securities Regulatory Commission (CSRC), which will launch a formal investigation into Everbright, has barred the brokerage from selling the shares for the next three months.

The mistaken trades on Friday sparked a flash rally that created and then wiped out roughly $100 billion worth of share value on the CSI300 Index in the course of a single day, Reuters calculations show. The CSI300 tracks the largest listed firms in China.

Everbright, which incurred a trading loss of 194 million yuan ($31.73 million) due to the computer glitch, potentially faces demands for compensation from investors who lost out from the market rally triggered by the trading fluke.

"We will use our own funds, disposal of securities assets and utilise other financing channels to resolve any future liquidity problems," the brokerage's board secretary Mei Jian told Reuters in an interview on Monday.

Mei added that Everbright will adopt an "earnest and positive" attitude towards any possible compensation demands.

While there was no indication that the systems glitch involved other brokerages, the Chinese state media is saying the trading fluke is symptomatic of broader market ills.

The official China Securities Journal said on Monday the malfunction has exposed major flaws in how Chinese stock exchanges are run, alleging that there are defects in bourses' warning mechanisms.

Compounding Everbright's woes, the brokerage executed a mistaken bond trade on Monday morning due to human error.

INVESTOR CONFIDENCE

The malfunction in Everbright's internal propriety trading system on Friday comes at a time when China is trying to revive investor confidence in its sagging stock markets. This does not bode well for corporates looking to raise funds through share sales.

Many Chinese firms are under increasing funding pressure as economic growth indicators in China show signs of stuttering. But Beijing is uncomfortable with loading up the banking system with more risky loans - or with pushing such firms into the country's so-called shadow banking system where non-bank lenders price credit at far higher levels.

The Shanghai Composite Index closed 0.8 percent higher on Monday, while the CSI300 was up 1.2 percent.

"It is unclear how strong the impact of the Everbright Securities trading error will be on wider market sentiment," said an analyst at Cinda Securities Co Ltd, who spoke anonymously as he is not authorised to talk to the press.

"From today's stock performance, we can see that there hasn't been a large fall in share prices in the market. If it is a one-off accident, then it won't have an impact. But if the results from the investigation result in new stricter regulatory measures, then this may have more of an impact."

He also said it was unclear whether the development would impact plans to restart initial public offerings (IPOs) later this year, or the proposed launch of a government futures trading market, once said to be scheduled for August.

Since late last year, China has halted all IPO approvals as it rewrites listing rules to improve transparency as part of efforts to boost the sagging market. But regulators have come under pressure from companies to allow new listings to resume, having already given way and permitted a few select firms to conduct secondary issuances.

UNINTENDED ORDERS

Everbright Securities on Friday placed unintended buy orders totalling 23.4 billion yuan, of which nearly a third was actually traded.

Because of a T+1 system in China's stock market, the brokerage could not sell shares it bought on the same day, which forced it to build huge short positions in the index futures market, totalling 7,130 lots, according to the brokerage.

The China Financial Futures Exchange (CFFEX) said late on Sunday that it has slapped restrictions on the number of new stock index futures positions that the brokerage can build.

Many persons claiming to be Everbright clients have complained online that while Everbright's trading mistake would come at their expense, the profits booked off the short hedging would not be redistributed fairly.

Everbright said on Monday that any profits yielded from the massive index short positions it erected on Friday to offset the impact of its accidental purchases would be dealt with legally.

Trading in the yuan-denominated shares of China's fifth-biggest brokerage has also been halted since Friday afternoon on the discovery of the trading error. Trading will resume on Tuesday, the company said.

The brokerage's A-shares changed hands at 12.12 yuan each at midday on Friday, up 6.69 percent in line with the market spike, before trading was suspended.

Hong Kong-listed China Everbright Ltd (CEL), which is owned by the same parent company China Everbright Group and holds around 33 percent of Everbright Securities, ended up 0.2 percent on Monday. ($1 = 6.1150 Chinese yuan) (Additional reporting by David Lin, Pete Sweeney and the Shanghai Newsroom, and Vikram Subhedar in HONG KONG; Editing by Ryan Woo)


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