Another day, another trading error - except this time it's not a Flash Crash but a Flash Surge.
A state-controlled Chinese brokerage saw a suspicious surge in trading yesterday on the Shanghai Stock Exchange and now finds itself under investigation by China’s Securities Regulation Commission.
Yesterday, Everbright Securities, a brokerage that is part of group made up of hotels and financial firms, experienced a surge on the Shanghai Composite Index. The usually-stable index soared 53 percent and reached its highest levels since 2009. Subsequently, shares on Everbright were suspended from trading.
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In a statement to the Shanghai bourse, a representative from Everbright Securities said, "When the proprietary operation of the strategic investment department of Everbright Securities used its independent arbitrage system, it encountered a problem." (In other words, it was a technical 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," a trader operating out of a Shanghai brokerage tells Reuters.
This type of Flash Surge is unique in Asia as it adopts high-frequency and algorithmic trading. "‘I haven't seen this kind of error in at least the past 10 years," Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group, tells Bloomberg. "This is an extraordinarily big loophole, which doesn’t just show defects in Everbright, but also the A-share market."
This happened almost one year and two weeks to the day of the runaway algorithm that hobbled and eventually strangled Knight Capital. While these trading errors have been occurring on a fairly frequent basis - BATS and Direct Edge suffered outages last week in the states - the damage from these events can be profound. After all, Knight Capital was one of the most respected and tech-savvy second-tier trading firms on the Street. And now, thanks to one runaway algo that took hours to unravel, that firm has been chopped up and sold off to the highest bidders.