'Design flaws' blamed for market spike

The China Securities Regulatory Commission (CSRC) said Sunday that "design flaws" in Everbright Securities Co's trading programs were the reason for a major spike in the Shanghai Stock Exchange on Friday.

Shanghai-based Everbright Securities, China's fifth-largest brokerage by market value, mistakenly sent a large number of market orders to the Shanghai Stock Exchange because its proprietary trading system's "design flaws in fields such as program calls and credit control were triggered sequentially," according to a statement posted on the CSRC website.

According to a statement released on Sunday afternoon by Everbright Securities, the company's malfunctioning trading system created 26,082 unexpected orders within two minutes Friday at around 11:05 am.

The error pushed the benchmark Shanghai Composite Index up to 2,148.39 by 11:30 am. Major stocks on the Shanghai bourse, including Industrial and Commercial Bank of China and PetroChina, saw their share prices jump by the daily limit at the same time.

The total orders reached 23.4 billion yuan ($3.83 billion). with actual transactions of 7.27 billion yuan, the CSRC said.

Although no staff members at the brokerage were found to have operated the system improperly, the CSRC said it has started an investigation into Everbright Securities regarding the case.

"The company immediately stopped the strategic investment department from adding new arbitrage systems. We have also dispatched specific personnel to do a re-inspection and have asked arbitrage services to conduct self-inspections, so as to clear all the blind spots," Xu Haoming, CEO of Everbright Securities, said at a press conference on Sunday afternoon.

Everbright Securities said the error resulted in a mark-to-market loss for the company of 194 million yuan, while its long-term influence on the company cannot be estimated just yet.

Trading of the company's shares was halted on Friday afternoon, and it reportedly applied to cancel the morning trading. However, the Shanghai bourse announced that all completed trades would be cleared as usual.

Many retail investors have been seeking legal assistance in order to get compensation as they had bought stocks during the surge in the Shanghai bourse on Friday.

Li Daxiao, director of research at Yingda Securities, told the Global Times Sunday that the results of the CSRC's investigation will be needed before investors can seek compensation.

Zhu Lixu, an analyst with Xiangcai Securities, told the Global Times Sunday that the incident is not likely to dampen investors' confidence in the A-share market in the long run.

"Everbright Securities did not engage in inside trading or manipulation of the market, so investors should consider this incident as an extreme and rare case," Zhu noted.