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China’s wild swings spark confusion in markets

The arbitrage system of Everbright Securities Company Limited encountered problems this morning, resulting in the benchmark Shanghai Composite Index climbing 3.19 percent to end the morning trade at 2,148.39 points, a two-month high.
ChinaFotoPress | Getty Images
The arbitrage system of Everbright Securities Company Limited encountered problems this morning, resulting in the benchmark Shanghai Composite Index climbing 3.19 percent to end the morning trade at 2,148.39 points, a two-month high.

Traders got a distraction from the wash of red on their screens Friday as China's share market served up a wild ride and a bit of a mystery.

The Shanghai Composite Index surged by as much as 5.6 percent in morning trade before ending down a tame 0.6 percent.

The spike higher was initially triggered by jumps in shares of China Merchants Bank and Sinopec, within just one or two minutes, traders said, but the gains spread across the board.

(Read more: China market bounce: trend change or false alarm?)

After the market close, major brokerage Everbright Securities offered itself as a key suspect, saying in a filing to the Shanghai Stock Exchange that its proprietary trading bureau encountered problems with its own arbitrage system, triggering talk the share spike may have been a result of a trading error.

Major Chinese business newspaper the 21st Century Business Herald reported Everbright was applying to cancel all its morning trades. China's market regulator said it was still probing the volatility late Friday afternoon.

But until the close, traders swapped rumors and innuendo about what might have caused the fluctuations.

"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 Shanghai-based trader at a major Chinese brokerage told Reuters.

"China is the epicenter of the market today. I think Asia is pretty quiet and I think this has brought a bit of excitement to the afternoon," said Chris Weston, chief markets strategist at trading firm IG. People were "clutching at straws."

(Read more: China's rebound could stall once this quarter is over)

"Everyone has got their own little rumors," he said, noting that in addition to the fat-finger trade rumor, there was talk of a reserve ratio cut or another major bullish announcement for the banks.


Among other rumors, talk emerged that perhaps authorities would allow traders to begin selling Chinese stocks on the same day they were purchased, said Leo Wang, an analyst at China Market Research Group in Shanghai; currently traders must wait at least one day.

(Read more: Goldman slashed target for China stocks)

He said traders were also speculating the Chinese government was trying to boost the index to stop traders from shorting the market.

—By Leslie Shaffer, CNBC. Reuters contributed to this story.

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