Flash rally for China shares crashes; trading fluke blamed

By Clement Tan and Lu Jianxin

HONG KONG/SHANGHAI, Aug 16 (Reuters) – A mysterious surge in Chinese stock markets that lifted major indexes sharply early on Friday evaporated in the afternoon – and it appears likely the entire rally stemmed from a trading mistake.

The Shanghai Composite Index and the CSI300 Index started the day lower and then inexplicably began roaring up in the mid-morning, pulling Hong Kong shares up with them.

At the peak, the Shanghai benchmark was up 5.6 percent and the CSI300 was 4.4 percent ahead. But afternoon tumbles left them down 0.6 percent and 0.8 percent, respectively, for the day.

Financial heavyweights saw big gains from the rally, but most of these disappeared in the afternoon.

Mid-sized lenders China Minsheng Bank and Industrial Bank, both of which jumped more than 8 percent in the morning, ended the day up only 0.1 and 1.5 percent, respectively. Ping An Bank, which had surged the maximum 10 percent limit in Shenzhen, finished up 3.7 percent.

Late Friday afternoon, China’s securities regulator said it was still probing the volatility.

Traders and analysts offered a variety of explanations for the morning spike: that it was being engineered by regulators to punish short-positions in Chinese banks; that it was an error in the Shanghai Stock Exchange’s computer; that the central government was planning to convert its stakes in large cap counters held into preferred stock.

But the most plausible theory in circulation appears to be that the spike was the result of a trading error at China Everbright Securities.

The major securities broker saw trading in its shares suspended in the afternoon, according to a statement on the website of the Shanghai Stock Exchange.

China Everbright Securities told the Shanghai Stock Exchange, in a subsequent filing, that its proprietary arbitrage trading system had experienced a problem in the morning.

Reuters was unable to reach the company for comment.

WAS IT HUMAN ERROR?

“We know something went wrong at Everbright Securities, but whether it’s a fat finger human error or something went wrong with the technology or the execution of one of their algorithms remain to be seen,” said a Shanghai-based trader at a major Chinese brokerage.

The 21st Century Business Herald, a Chinese business newspaper, reported that Everbright was applying to cancel all its morning trades.

The Shanghai Stock Exchange announced on its official microblog account that all transactions completed Friday will be settled as normal. In addition to potential losses incurred by Everbright Securities and those who followed its lead, the surge also caused heavy losses in programmed trading for short positions in the futures market, traders said.

Guo Yanling, senior analyst at Shanghai Securities, said many parties began buying shares even though it wasn’t clear why stocks had begun to surge.

“This has been confirmed as an own-goal incident, but it still says a lot about what the market is thinking about. There’s been a lot of reform talk, in particular about converting government stakes in index heavyweights into non-tradeable shares, so with this in mind lots of traders followed Everbright’s bids,” she said.

Hong Kong markets tracked the see-saw mainland markets. The Hang Seng Index eventually ended down 0.1 percent, while the China Enterprises Index edged up 0.1 percent. Both still held onto strong weekly gains, spiking 3.3 and 6.5 percent – their best since November and January, respectively. (Writing by Pete Sweeney, Editing by Richard Borsuk)

This was first published at Reuters.com.