According to a statement released by the Hong Kong regulator, on 8 September 2011 an account executive of SHKIS received an order from a client to buy 25,000 shares of China Life at HK$18.82. The account executive, however, mistakenly inputted “2,500,018,000” shares as the order quantity. The dealing system of SHKIS automatically split the erroneous order into 834 smaller orders which were then sent to the market. The maximum order size of a stock that is accepted by the Stock Exchange of Hong Kong is 3,000 board lots, and for China Life, one board lot is 1,000 shares.

The account executive realised the error shortly after she inputted the order and immediately sought assistance from other dealing staff members to cancel the execution of the split orders - according to the statement, SHKIS’s real-time credit controls failed to filter the erroneous order due to an incorrect setting in the credit rules.

About 97 per cent of the orders were cancelled while the remaining 3 per cent (i.e. 81,978,000 shares) were filled and executed at the price of HK$18.82 each.

The SFC’s investigation revealed various “weaknesses” in SHKIS’ internal controls which contributed to the incident. In particular, the statement said:

• SHKIS’ system did not impose a limit on the maximum number of splits allowed for large orders;
• amendments or changes to the credit rules were not migrated from the testing environment to the production environment directly, but were manually entered into the production environment by a staff member of the credit department, increasing the likelihood of input errors; and
• there was a lack of segregation of duties between the “maker” and the “checker” for changes to the credit rules/policies. In implementing the new credit rules on 29 August 2011, the relevant credit officer deployed, checked, as well as approved the changes. No post-deployment validation was performed by any independent third party to ensure the changes were implemented accurately and completely.

In deciding the disciplinary sanction, the SFC said it took into account that SHKIS has:

• informed the SFC about the error trade in a timely manner;
• promptly investigated the incident to ascertain the factors which contributed to the error trade, and engaged an external audit firm to independently conduct a review and give recommendations for system and control enhancements;
• taken remedial actions to prevent the same incident from re-occurring in the future;
• cooperated with the SFC in resolving the disciplinary action; and
• agreed to further engage an independent reviewer to review its order entry risk controls in relation to its cash equities dealing, and to implement all recommendations to be made by the reviewer.

SHKIS is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.