China central bank warns against same-day stock trading

SHANGHAI, April 30 Tue Apr 29, 2014 9:57pm EDT

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SHANGHAI, April 30 (Reuters) - The People's Bank of China (PBOC) warned against implementing a same-day trading system for mainland stocks on Tuesday, as securities regulators consider how best to protect retail investors from manipulation by institutional funds.

"On the surface, 'T+0' trading can certainly help investors respond to changes in market sentiment in a timely way, locking in profits and preventing losses from widening; you can also say it would invigorate the market and improve revenues at brokerages, but the risks in T+0 trading are hard to ignore," the PBOC wrote in its 2014 Financial Stability Report.

Calls for China to allow small investors to buy and sell stocks on the same day (known as the "T+0" system used in most developed stock markets), as opposed to the current system in which most investors can only buy on one day and sell the next (T+1), increased in the aftermath of a trading scandal related to a "flash crash" caused by an automated trading error at Everbright Securities.

On Aug. 2013, a glitch with Everbright's order execution system sent 26,082 erroneous "buy" orders worth 68.6 billion yuan ($11.26 billion) to the Shanghai Stock Exchange during a two-minute period, leading to a short-lived 6 percent pop for the main index.

Everbright reacted to the errant trades by building up huge short positions in index futures, before it disclosed details of the glitch - the revelation of which caused indexes to collapse - for which several Everbright executives were charged with insider trading and banned from the industry for life.

The many small retail investors who jumped on the bandwagon as the index soared couldn't get off when it crashed, thanks to the T+1 rule. Nor could many hedge their bets, as trading in index futures is still limited to institutional and wealthy investors with more than 500,000 yuan in their accounts.

As a result, some analysts predicted that China would move to a T+0 system in the first half of 2014, focused on allowing same-day trading in liquid large-cap stocks.

The central bank, however, said that same-day trading would increase the risk of market manipulation, and also complicate trade settlement and aggravate volatility.

The PBOC does not have a mandate to directly regulate the stock markets, which are overseen by the China Securities Regulatory Commission (CSRC), but is charged with maintaining overall financial stability.

Chinese regulators continue to struggle to restore confidence in domestic stocks as an asset class, given their poor performance compared to other kinds of investment.

China's stock markets have been among the world's worst performers in recent years and are still down around 60 percent from their peak in 2007, with some analysts blaming the malaise on the market's reputation for price manipulation and insider trading by well-connected operators. (Editing by Eric Meijer)

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