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. Source: ChinaFotoPress via Getty Images

Aug. 19 (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 Aug. 16 by a trading error at Everbright Securities Co. 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.

“The timing was not good for trading errors in China,” Brian Jacobsen, who helps oversee $221.2 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, said by phone. “There are already a lot of skeptics out there and an event like that can erode some people’s confidence.”

‘Going Nuts’

The Shanghai Composite has lost 8.8 percent this year, versus a 9.8 percent gain in the MSCI All-Country World Index. Chinese stock accounts containing funds have dropped to 54.4 million from 57.3 million in June 2011, according to regulatory data compiled by Bloomberg.

Economic growth slowed for a second straight quarter to 7.5 percent in the three months ended June, extending the longest streak of expansion below 8 percent in at least two decades.

About 15.3 billion shares of Shanghai Composite companies changed hands Aug. 16, versus the 30-day average of 10 billion, data compiled by Bloomberg show. Sixteen of the measure’s 20 biggest companies by weighting rose by the 10 percent daily limit during the morning session.

“I thought the market was going nuts and someone was coming to manipulate the market,” said Yao Lina, a 33-year-old accountant working for a food company in Shanghai. “I have no confidence in the market because there are lots of speculators playing in it.”

Earnings Impact

The Shanghai Composite fell 0.7 percent to 2,054.65 at 9:34 a.m. local time.

The government restricts access to mainland markets through its Qualified Foreign Institutional Investor program, which has granted international firms a combined quota of $44.9 billion as of July 30. That compares with the $3.1 trillion market value of locally listed companies.

Everbright Securities, the nation’s ninth-largest brokerage by assets, said it may face a penalty from regulators and that its earnings will probably be affected.

The mark-to market loss was about 194 million yuan ($32 million), the company said in a statement filed to the Shanghai exchange in which it also apologized for the incident. It blamed a flawed arbitrage trading system and said it used its own funds and liquidated some securities holdings to ensure clearing.

The China Securities Regulatory Commission has decided to investigate the brokerage, according to a statement posted on the regulator’s website. No human operational errors were detected in Everbright Securities’ trading on Aug. 16, it said.

Flash Crash

The regulator has banned the brokerage from conducting proprietary trading until Nov. 18, according to a company statement.

The shares were suspended in Shanghai trading. China Everbright Ltd. which owns a stake in Everbright Securities, declined 1.6 percent in Hong Kong.

Disruptions in electronic markets have been under scrutiny since the May 2010 flash crash, when the Dow Jones Industrial Average fell almost 1,000 points in minutes before rebounding. Osaka’s derivatives platform malfunctioned in March, while orders for Indian stocks improperly entered by a Mumbai brokerage in October sent the CNX Nifty Index down 16 percent in eight seconds before it rebounded.

Knight Capital Group Inc. lost more than $450 million after sending erroneous orders to U.S. exchanges on Aug. 1, 2012, because of a computer malfunction.

Bad Timing

“The U.S. also has fat fingers, it’s normal,” said David Poh, the regional head of portfolio-management solutions at Societe Generale’s private bank, which oversees about $113 billion. “The incident didn’t disrupt our trading. Investors should be smart enough to know it’s only a technical glitch.”

The Shanghai measure is valued at 11 times reported earnings, down from 29 times at the peak in 2009. The index, which traded at a 59 percent premium versus the Standard & Poor’s 500 Index four years ago, is now 30 percent cheaper, data compiled by Bloomberg show.

“The timing is bad” for big market swings given low levels of investor confidence, said Ronald Wan, a committee member at the Hong Kong Securities & Investment Institute.

The Aug. 16 surge in stocks was caused by “sizable” buy orders from Everbright’s proprietary accounts, the CSRC said in a statement. The Shanghai Stock Exchange said operation of its trading system was normal and trades will be settled as usual, according to a statement on its official microblog.

ICBC, PetroChina

Xiao Gang, who succeeded Guo Shuqing as head of the securities watchdog in March amid a leadership transition in the ruling Communist Party, said in the CSRC’s 2012 annual report published July 16 that the regulator will focus on making the nation’s capital market more open and efficient while it strengthens its legal framework.

The initial surge on Aug. 16 occurred between 11:05 a.m. and 11:07 a.m. in Shanghai. China Minsheng Banking Corp. was among the earliest stocks affected, with its shares surging to 9.78 yuan from 8.83 yuan within one second, according to data compiled by Bloomberg.

PetroChina Co. and Industrial & Commercial Bank of China Ltd. the nation’s two biggest companies by market value, also jumped by the daily limit. Volume in PetroChina was 239 percent above the three-month average and 269 percent greater than the average for ICBC, data compiled by Bloomberg show.

“I haven’t seen things like this for ages,” Chen Shide, a Guangzhou-based money manager at GF Fund Management Co. which oversees about $16.7 billion, said by phone. “The market sentiment will continue to remain weak.”

To contact the Bloomberg News staff on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net ; Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Michael Patterson at mpatterson10@bloomberg.net