Shanghai Composite's Flash Spike: Fat Finger or Botched Manipulation?

Instead of a flash crash, like in the US where the Dow Industrial Averages suddenly dropped by 1,000 points intraday in May 6th of 2010 that had been blamed on a combination of factors—technical glitch, high frequency traders and large one sided directional bets—yesterday the Chinese bourse experienced the opposite: a flash spike!

From Bloomberg:

The biggest swing in China’s benchmark equity index since 2009 threatens to further erode confidence in the nation’s stock market after it lost more money for investors than any in the world during the past four years.

China’s shares were roiled yesterday by a trading error at Everbright Securities Co. (601788)that spurred a 53 percent surge in volumes and a swing of more than 6 percent in the Shanghai Composite Index. The gauge jumped from a loss of as much as 1 percent to a gain of 5.6 percent in two minutes during the morning session, then ended the day with a 0.6 percent drop. Erroneous buy orders from Everbright’s proprietary trading group sparked the early rally, the securities regulator said.

The Chinese stock index has tumbled 40 percent from its August 2009 high, erasing about $644 billion in market value, as the world’s second-largest economy slowed and local investors emptied more than 2 million equity trading accounts. Only Greece’s ASE Index has fallen more in percentage terms.

Yesterday's intraday action of the Shanghai Composite (SSEC)

Despite the initial 6%+ surge, the Shanghai index closed down by .64% (data and chart from Bloomberg)

The flash spike from a 6 months perspective (from stockcharts.com).

Again the supposed culprit from the same article

Everbright Securities, the nation’s ninth-largest brokerage by assets, disclosed its trading error in a statement filed to the Shanghai exchange. Board Secretary Mei Jian didn’t return a call and text message seeking comment.

Everbright Securities is a state owned enterprise controlled by state owned conglomerate the China Everbright Group.

So instead of the fat finger error theory, my suspicion and conjecture is that this could have been a botched attempt to push the stock market higher. Perhaps this may have been part of a PR campaign to paint a picture of stability and of a ‘revitalized’ economy, where, in reality, the latter has been tainted by unsustainable bubbles fostered by frenzied debt expansion. 

Unfortunately, such actions failed to trigger the desired bandwagon effect, so the involved company was forced to make a disclosure predicated on the fat finger error.

Nonetheless whether fat finger error or not, such faux pas will “cost Everbright an extra 3 billion yuan” (or US $490.1 million) according to the South China Morning Post. 

Pity the Chinese taxpayer.