Investors check share prices at a brokerage in Haikou, Hainan province, on Thursday. (Photo/China Daily)
Hundsun Technologies Inc, the financial software company backed by e-commerce giant Alibaba Group Holding Ltd, has halted the services of its controversial HOMS trading system after the market regulator intensified efforts to crack down on illegal stock financing and trading.
The announcement came after the China Securities Regulatory Commission investigated the company on Monday over concerns that its trading platform may have been involved in illegal market practices that triggered the heavy correction of the A-share market.
The company said in a statement that it has shut down the account opening function of its HOMS system. In addition, all accounts with zero balance will be closed and clients will be banned from adding new funds to the existing accounts.
The measures will have "significant impact" on its earnings, the Shanghai-listed company said in the regulatory statement. Its share price tumbled by the 10 percent trading limit on Thursday for the second consecutive day.
Funds worth trillions of yuan are believed to have been channeled through the HOMS system into the stock market, which fueled the frenetic rally followed by a 30 percent slump in less than four weeks.
Online margin lenders and trust companies have used the system to provide trading services to their clients and offer highly leveraged funds of up to 10 times their starting capital through multiple sub-accounts that were registered under false names. The practice violated the securities regulation that requires the use of real names and ID numbers.
The HOMS system was originally designed to enable private equity funds to divide one registered account into many sub-accounts operated by different fund managers so that they could efficiently monitor investment returns.
Dong Dengxin, head of the finance and securities research institute at Wuhan University of Science and Technology, said that shutting down part of the system's function is only a temporary administrative measure amid the market turmoil. It is not a long-term solution for a balance between financial innovation and regulation.
"Innovation is like a sharp knife which is necessary for good cooking, but it can also be used as a killing weapon," Dong said, noting that more sophisticated regulation is needed and the one-size-fits-all regulation could run the risk of demotivating innovation.
Meanwhile, volatile trading continued on Thursday at the nation's bourses, reflecting the growing divergence among investors on the future direction of the market.
The benchmark Shanghai Composite Index gained slightly by 0.46 percent to close at 3,823.18 points.
Crackdown on 'malicious' short-selling
Shanghai police have identified trading companies that engaged in "malicious" short-selling of A-share equity futures, within a market manipulation probe, the China Times has reported.
The report said a source with the city's police force, who asked not to be identified, confirmed they have already found evidence of "malicious" short-selling, but refused to reveal any further details.
The China Securities Regulatory Commission defines "malicious" short-selling as cross-market manipulation, including manipulating the spot and futures markets of stocks to gain profits.
Shanghai Public Security Bureau's economic crime investigation department told China Daily on Thursday that it could confirm that investigations are in progress.
It declined to comment whether any companies had been identified, or whether measures of malicious short-selling had been identified.
Market insiders said it could take at least a week to cross-check capital flows of the more than 1,000 trading companies that are registered in Shanghai.
Wang Xin, an analyst with a Hangzhou-based futures company, said most investors, individuals and institutions, especially trading companies, trade futures to hedge risk, and have no incentive or often not enough capital for malicious short-selling in the A-share market by trading stock index futures.
If any trading company had been involved, Wang said it may well have been used as a "sock puppet" to channel significant volumes of capital from onshore or offshore into China's capital market, through false trades.
