Shanghai exchange to discipline 4 brokerages for 'disruptive' trading

The Shanghai Stock Exchange vowed Monday to discipline four brokerages whose irregular activities triggered a high-profile market slump in the final minutes of trading on Dec 20.

Through its micro-blogging service, the SSE said it will take "self-discipline regulatory measures" - the lightest of equity market punishments in China - against four brokerages identified as UBS Securities, Guotai Junan Securities, China International Capital Corp and Orient Securities.

At the end of trading on Friday, Dec 20, banking shares that included those of Bank of Communications Co Ltd and China Construction Bank Corp plummeted, while six other stocks fell below the trading limit of 10 percent.

In the Monday statement, the SSE said the sudden drop was caused by the four brokerages' engaging in large-volume selling in response to requests from clients.

The orders were sent by UBS AG, Citigroup Inc, HSBC Holdings PLC and Martin Currie Investment Management Ltd through Qualified Foreign Institutional Investor accounts, which give foreign fund managers access to Chinese capital markets.

They were using the last trading day to adjust positions to track the FTSE Xinhua China A50 Index, which was scheduled to update constituents on Monday, Dec 23.

The SSE said the four brokerages failed to exercise professional judgment and diligently review orders, and that they breached the exchange's trading rules.

In a Dec 27 statement, the China Securities Regulatory Commission said that the execution of large transactions that significantly deviated from market prices was "disruptive" to market order and that any wrongdoings found in follow-up investigations would be met with a "serious penalty".

The SSE said trading from global brokerage UBS Securities caused the biggest market impact. A spokesperson from UBS Securities said, "We are not commenting on this matter." Calls to other brokerages went unanswered on Monday.

Amanda Luo, a Shanghai-based public relations official with Citigroup, said through an e-mail that "we have no comment on this".

The SSE said it found no irregular trading activities in the CSI 300 index futures, which tracks the biggest A-shares in China.

That indicates that the brokerages probably will not be accused of market manipulation for profit.

The CSRC probe showed that the four QFIIs sold shares that reduced weight from or were taken out of the index, and bought shares that added weight or were admitted to the index.

Shares taken out during the seasonal adjustment include China Coal Energy Co Ltd and Inner Mongolia Baotou Steel Rare-earth (Group) Hi-tech Co.

Reduced-weight shares of Bank of Communications and China Construction Bank were sold.

Zhang Qi, a stock analyst with Haitong Securities, said the brokerages could have done better in executing orders.

"Instead of placing orders at last minute, they should have spread the orders throughout the day," Zhang said.