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Everbright pain seen as industry gain as investors look to bright side

A department office of Everbright Securities is pictured in Beijing, August 16, 2013. REUTERS/Jason Lee
A department office of Everbright Securities is pictured in Beijing, August 16, 2013. REUTERS/Jason Lee

By Pete Sweeney

SHANGHAI (Reuters) - Chinese brokerage Everbright Securities <601788.SS> has been hit by falling shares, record fines and executive resignations following a massive trading scandal, but investors are hopeful the incident will herald better risk controls.

Shares of Everbright Securities slumped 10 percent in Shanghai on Monday, their daily limit. However, shares in other mainland brokerages including CITIC Securities <600030.SS>, Haitong Securities <600837.SS> and Huatai Securities <601688.SS> rose as investors shrugged off concerns the Everbright scandal would have knock-on effects.

On August 16, an apparent combination of software and human error at Everbright caused an unintended placement of buy orders worth 68.6 billion yuan ($11.2 billion) to the Shanghai stock exchange, setting off a short-lived 6 percent jump in the Shanghai Composite Index <.SSEC> and an ensuing "flash crash."

"It was very quickly identified as to what the problem was, where it came from and exactly trades were involved, and it was very quickly dealt with," said Olivier D'Assier, Asia Pacific managing director for stock index developer Axioma in Singapore.

"As long as the regulators' reaction to this is fair and transparent in terms of reversing the errors and penalizing those who committed them, I think the overall trust in the system remains."

Analysts also said that while the scandal did raise questions about risk control mechanisms at the Shanghai Stock Exchange, investors appeared to understand such errors are not exclusive to China and have happened in developed markets too.

"This is a good thing," said Cao Xuefeng, head of research at Huaxi Securities in Chengdu, positive that the Shanghai Stock Exchange will implement better risk controls to prevent repetitions of the trading glitch.

BAD DAY ON THE MARKET

When Everbright knew of its errant trades, it reacted by quietly building up huge short positions in index futures and exchange-traded funds before disclosing details of the glitch - the revelation of which caused indexes to collapse back into negative territory.

The strategy helped Everbright hedge its losses, but investors who followed Everbright's lead into banking shares lost heavily in the aftermath. It also happened to be illegal, according to regulators.

Analysts said many investors jumped on the bandwagon believing widely circulated rumors that Beijing was ready to announce plans to convert government shares in major listed companies - banks in particular - into preferred shares, effectively shrinking the float with a positive impact on values.

Since this policy had been publicly discussed before, and because Everbright's erroneous trades were targeting index heavyweight banking shares, many investors joined the rally on the assumption that Everbright was investing on an insider tip, analysts said.

With an eye on this collateral damage, the securities regulator said last week that it will levy an unprecedented 523 million yuan ($85.46 million) fine on Everbright Securities.

Multiple executives at the brokerage have resigned or have been pushed out. Four have been banned from the industry for life. ($1 = 6.1195 Chinese yuan)

(Additional reporting by Chen Yixin; Editing by Ryan Woo)

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