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Market may see return of same-day trading
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Chinese equity traders believe the government is considering resuming a same-day stock trading system, after a recent insider-trading scandal saw small investors trapped in losing positions by regulatory restrictions.
They say that bringing back the settlement system known as “T+0” would boost battered mainland markets. China’s Shanghai Composite Index has lost about two-thirds of its value since late 2007, and regulators have struggled since then to restore confidence.
China needs a vibrant market that would promote two policy goals — giving retail investors an alternative to the real estate investment craze that has fuelled inflation, and giving Chinese firms a viable fundraising tool separate from bank borrowing.
The current “T+1” system was originally implemented in 1995, shortly after massive speculation tripled the value of the main index in just two months. By preventing investors from jumping in and out of positions in a single day, regulators hoped to discourage the sort of herd mentality investing behavior that could lead to a massive collapse.
Regulators followed up by barring stocks from rising or falling more than 10 percent on a single day, further cramping momentum moves.
But there are few signs the restrictions have improved the Chinese stock investor culture. Instead, value-oriented investors have largely exited mainland stocks, putting their money into real estate and high-yielding wealth management products, both widely considered one-way bets.
At the same time, other forms of financial innovation have put the investors who remained at greater risk than before.
“A consensus is building that using administrative edicts to enforce the T+1 system is not market-oriented,” said Ren Chengde, a senior analyst at Galaxy Securities in Shanghai.
With market reforms already underway, the T+0 system might be back in use in the first half of 2014, Ren said.
On October 19, the Shanghai bourse took a short step in that direction, announcing it will permit T+0 trading in exchange-traded funds (ETFs) that follow bonds or bond indexes, money market funds and gold, from December 9.
No legal barrier
Also, there is no legal barrier to resumption of T+1, as the government removed a clause banning T+0 trading from the country's securities law in 2006.
China has suffered multiple trading scandals, and regulators are still struggling to combat the widespread perception that the market is a hive of speculation and insider trading.
The most recent scandal, which led authorities to hit Everbright Securities with a record fine and bar top executives from the industry for life, may have spurred the government to move more quickly.
It can be argued that the scandal would have had less fallout if T+0 had been in place.
On August 16, a glitch with Everbright’s order execution system sent 26,082 erroneous “buy” orders worth 68.6 billion yuan (US$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.
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.
Bid to build confidence
“Judging from the need to protect the interests of small and medium-sized investors and maintain the fairness of the market, the Shanghai Stock Exchange believes it is necessary to quicken the pace to study and justify the T+0 trading system," the bourse said after the Everbright scandal, but gave no timetable.
In a bid to build confidence in the market, regulators have exhorted retail investors to go long on blue-chip stocks. They have also introduced new derivatives products, hedging tools and low-maintenance ETFs tracking major indexes, which they hope will pull money back into the part of the market they think most needs funding.
Traders believe that the liberalization of T+0 is likely to start by targeting blue-chip companies.
“Regulators hope to test new methods to activate the stock market, in particular trading in large-capitalized blue chips,” said analyst Zhang Gang at Central Securities in Shanghai.
“The first major step to resume T+0 stock trading is thus logically expected to start with large caps,” he said. “It may take some time to cover all the products as past experience has proven the necessity of tighter supervision.”
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