Error in Singapore Forced Unwinding of 110,000 Trades

By Maria Trombly | Securities Industry News | August 6, 2007

The Singapore Exchange (SGX) recently faced the same operational risk consequences as the Tokyo Stock Exchange (TSE) and others in having deal with the aftermath of a miskeyed order.

According to a statement by SGX, a trader at DMG & Partners Securities on May 25 placed an order to sell 400,000 shares of DBS Group Holdings for 27 Singapore cents (17 cents U.S.). DBS, the parent of DBS Bank, is one of the largest companies by market cap on SGX. The last traded price for the shares was S$24.50 ($16.01).

SGX said the trader actually intended to sell 400,000 warrants. "The extreme price differential was exceptional," the exchange said in explaining why the order was invalidated. "And the entire order was matched in merely 12 seconds."

A total of 187,000 shares were matched at the 27-cent price. SGX cancelled 110,000 of those shares. The other 87,000 were cancelled upon mutual agreement between counterparties, the exchange said.

The increased speed and volumes of trading leave little margin for correcting traders' errors. Brokerages have been installing automated systems to catch anomalous or unusually priced trades. Such mistakes can have ripple effects beyond the directly affected brokerages. The Singapore incident briefly sent the benchmark Strait Times Index down 11.5 percent, or 400 points.

DMG director Boon Low told Securities Industry News that the brokerage has since instituted new procedures. "We consider the issue resolved," he said. "All necessary steps have been put into place and all relevant parties have been alerted to the issue." Low declined to comment further.

Echo of Tokyo

It was reminiscent of a December 2005 incident at the TSE. Mizuho Securities Co. was fined JPY10 million ($82,000) by the exchange, citing "insufficient training for stock dealers, insufficient check by higher-rank staff in placing orders, inappropriate personnel arrangement, no preparation of contingency plans for massive erroneous order placement, and insufficient design of electronic information processing system regarding order placement as follows."

A bigger problem was the fact that the exchange was not able to cancel the order promptly, which cost TSE president his job. A lawsuit filed by Mizuho against the exchange is still pending in court. Mizuho said that it lost 41.5 billion yen from the botched trade and other expenses.

"It is not common for traders [worldwide] to make enormous errors, but it is true that the checking process correlates with execution speed," said Yumiko Manchu, an analyst with the Tokyo office of Boston-based research firm Celent. "Once you press the execute button, there goes the order, and thanks to STP [straight-through processing], you can't stop it till it's done."

SGX didn't have safeguards in place to catch these errors, said a dealing director at a major Singapore brokerage who declined to be quoted by name. "I'm not aware of any developments at this point," he said. "There is nothing foolproof. With even the best system, there will be errors creeping in."

TSE responded by making structural changes to prevent recurrences. Trades exceeding 30 percent of listed shares will not be transacted, and the exchange will check with trading participants for trades totaling more than 5 percent of listed shares. There haven't been similar problems since the rules took effect, and "We are now working on introducing error-trade cancellation rules to be implemented in the fall," said TSE spokesperson Mitsuo Miwa.

Gene Law contributed to this report.