烏龍指(wu long zhi): Fat-finger trade

"Fat-finger trade", which refers to inputting error in trade, was suspected at the Shanghai Stock Exchange on Aug 16. On that fateful day, the Shanghai Composite Index surged by as much as 5.6 percent within minutes with some large cap stocks, such as PetroChina and Industrial and Commercial Bank of China, shot up by the maximum one-day limit of 10 percent.

Rumors flew thick and fast that fat-finger trade was at play or a major policy announcement was imminent. China Everbright Securities, the country's fifth-largest brokerage by market value, later said that its arbitrage system had encountered some problems. The brokerage said its trading system had erroneously created 26,082 orders within a couple of minutes around 11:05 am and mistakenly placed 23.4 billion yuan ($3.8 billion) of purchase orders with actual transactions of 7.27 billion yuan.

According to the China Securities Regulatory Commission, the rumored fat-finger trade was likely to be a machine-made "glitch" rather than a human error. But the exact cause of the "glitch" is still under investigation. Some investors who had bought stocks during the surge are now seeking legal help to get compensation.

Many investors are worried that the transaction and risk-control systems have deeper defects and quantitative trading risks are higher than feared, which may deal a blow to their confidence and undermine the credibility and stability of the equity market.

The China Securities Regulatory Commission and the Shanghai Stock Exchange are jointly investigating the incident, and they are expected to provide clear answers to investors.

(China Daily 08/23/2013 page9)