China To Examine Brokerages' Trading Software Following $3.8bn Buy Error

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By m rochan | August 23, 2013 1:20 AM EST

A department office of Everbright Securities is pictured in Beijing (Reuters)

China's stock markets regulator will examine stock trading software in use across the country's brokerages after a suspected technological glitch at one firm triggered erroneous trades worth a few billion dollars.

The China Securities Regulatory Commission's (CSRC) investigation will extend to over 110 brokerages. Everbright Securities, the Shanghai-based firm at the centre of the probe, its custom-built trading platform and the firm that built the platform Shanghai Mercrtsoft Technology are already under scrutiny.

On 16 August, a two-minute trading glitch at Everbright set off some 26,000 erroneous buy orders to the Shanghai Stock Exchange (SSE). The trades, worth 23.4bn yuan (£2.45bn, €2.86bn, $3.82bn), fuelled a rally on the SSE.

It helped Asia markets trim their losses by the end of day's trade.

Seventeen brokerage firms and four futures companies use Mercrtsoft's software. Everbright's high-frequency trading software was deployed in February, according to a report by China's state-controlled news agency Xinhua.

Everbright said this week that it lost 194m yuan ($31.7m) from that trading error. Mercrtsoft said it is "actively cooperating" with regulators and that day-to-day operations continue as normal.

The regulator's probe comes at a time when lower profits have forced Chinese brokerages to lower their IT spends.

Brokerage IT spending decreased 13.4% to 5.6bn yuan between 2010 and 2012, according to CCW Research, a Beijing-based IT consultancy.

"When it comes to new financial products and business lines, the finance industry people understand the risks, but they're not familiar with how to use technology to mitigate those risks. They don't understand IT," Reuters quoted Guo Chang, deputy general manager at CCW Research, as saying.

Mike Werner, an analyst with Bernstein Research who covers China's banks told the agency that as banks add more computer systems "one would have to wonder how well (the) systems are tested".

"There's now more chance for human and operational risk at the brokerages, rather than just policy risk," said Werner.

Everbright's stock price has dropped by some 17% since 16 August. The company's president Xu Haoming has stepped down. Yuan Changqing will take charge of the business in the interim.

The head of proprietary trading Yang Jianbo has been replaced by Li Haisong, the head of the brokerage's risk management department.

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