Hanergy: Bulk of Stock Collapse Occurred in Less Than a Second; Trading pattern echoes similar move seen in May 2010 ‘flash crash’


Hanergy: Bulk of Stock Collapse Occurred in Less Than a Second; Trading pattern echoes similar move seen in May 2010 ‘flash crash’


Updated May 22, 2015 6:11 p.m. ET


The collapse of a Chinese solar company’s shares this week was caused by a sudden wave of rapid-fire sell orders that sank the price in less than a second.

An analysis of trading data by The Wall Street Journal and interviews with market participants and analysts shows that the selling began with several large sell orders on Wednesday. Those orders were then followed by a wave of erratic computer-driven trades that sank the company’s stock by more than 25% in fractions of a second.Hanergy Thin Film Power Group remains suspended after the stock dropped 47% in total Wednesday, knocking billions out of the wallet of its chairman, who was once China’s richest man. Hanergy’s parent company said Thursday its operations were normal and it hadn’t sold any shares. The company had no further comment on the sudden share-price move.

For months, analysts had cautioned that the firm could be overvalued, warning that anew trading link between mainland China and Hong Kong had artificially propped up some stocks, especially in the clean energy sector. Hanergy has declined to comment on the concerns of these analysts.


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Heard on the Street: Hanergy Is Still a Head-Scratcher (March 31)

Heard on the Street: Hanergy Requires Extra Sunscreen (Jan. 5)

But the speed of Wednesday’s decline points more toward market dislocation, similar to what was seen in the May 2010 U.S. market meltdown that has come to be called “flash crash.”

In Hanergy’s case, a sudden burst of rapid-fire sell orders overwhelmed the market, causing a number of buyers to pull out, traders said. Some experts said the trading could have been designed to trick buyers into pulling back, a manipulative tactic known as “spoofing.”

The sell orders, many of which weren’t executed, may have “spoofed the computers into pulling their bids,” said Matt McClean, chief executive of Coleman Street Management in London and a computer-trading veteran.


The trading took place on the Hong Kong stock exchange. Hong Kong’s securities regulator, the Securities and Futures Commission, declined to comment.

Computer-driven trading in Asia has picked up in recent years, market participants say. Even so, Hong Kong had been thought of as potentially protected from the type of market reaction seen during the flash crash thanks to a large stamp tax on all trades, which in theory should tamp down the massive trading engaged in by high-frequency traders in the U.S. and elsewhere.

On Friday, Hong Kong’s market rose 1.7% while markets in China hit seven-year highs as investors ignored the dramatic decline of Hanergy and two other former highflying stocks this week. The other stocks, Goldin Financial and Goldin Properties, both plunged more than 40% Thursday. On Friday, Goldin Financial fell 3.2% while Goldin Properties rose 4.9%.

Spoofing came into focus in April after London trader Navinder Sarao was detained on U.S. charges that he profited from illegal trading strategies, including spoofing, from 2009 to 2014. According to the Justice Department, his actions contributed to the 2010 flash crash. Earlier this month, Mr. Sarao told a London court he had done nothing wrong as he fights extradition to the U.S.

Heavy trading in Hanergy’s stock began shortly before the company’s annual general meeting began at 10 a.m. in Hong Kong on Wednesday. At the time, trading in the stock was furious, with traders offering to buy and sell millions of shares at a time. Eventually, there were far more shares being offered for sale than there were buyers.


A branch of Hanergy Thin Film Power Group in Shanghai. PHOTO: IMAGINECHINA/ZUMA PRESS

At 10:17 a.m. and 23 seconds, a large 426,000 share sell order piled up at the current market price of HK$6.80. Two small trades were done at slightly lower prices, but then the price at which traders were willing to buy the shares fell to HK$3.45, according to data from Thomson Reuters.

This low bid showed that there weren’t many buyers in the market, potentially setting the stage for a big share decline. Computer algorithms, which trade automatically based on current market data, likely detected the sudden shift and reacted by selling more or pulling out of the market altogether, according to traders.

Nearly 16 hundredths of a second later, a series of smaller buy orders ranging from 8,000 to 30,000 shares trades were made at rapidly declining prices. The first buy order was priced at HK$6.69, and four tenths of a second later, a trade occurred at HK$6.10. Once that trade occurred, the next highest bid became HK$3.45 and over the next several hundredths of a second, the price that people were willing to sell shares fell to HK$4.50.

A trade occurred at HK$4.50, meaning the official market price had fallen by 26% in fractions of a second. Hanergy shares briefly recovered but then sold off again. They were trading at HK$3.91 when the shares were suspended at 10:40 after falling 47% and wiping out $20 billion worth of market value.

“The rate that the algorithm was selling at was too great for the market,” said Eric Hunsader of Winnetka, Ill., market-data firm Nanex, who examined the trades. He said the collapse could have been caused by high-speed traders pulling out of the market due to heavy selling by an investor looking to unload a large chunk of stock. Such investor trades are typically handled by computer algorithms.

Traders said the sudden dip, which occurred at 10:17 a.m. and 24 seconds, may have triggered orders programmed to automatically sell in a falling market and margin calls, causing a wave of selling which further drove down the price of the stock.

Before Wednesday’s plunge, Hanergy Thin Film was one of the Hong Kong market’s best performers. Even after the slump, Hanergy’s shares as of Wednesday’s halt were up more than 42% since the beginning of the year and are more than triple their level of one year ago.

The relatively small public float of Hanergy was blamed for the stock’s rise and could be one reason the shares fell so quickly. Hanergy’s chairman, Li Hejun, owns 80% of the shares of the company.

The Hong Kong stock market has grown more volatile since November when regulators opened a trading link between the city and China’s main stock exchange in Shanghai. The Chinese market is notoriously volatile and some of the fast-trading investors who drive shares up and down in Shanghai have begun trading in Hong Kong. The exchange in Hong Kong has denied this, saying in March that “we do not believe that mainland flow through Stock Connect necessarily increases volatility.”

On Friday in a filing with the Hong Kong stock exchange, Mr. Li disclosed he went short 759.7 million shares in Hanergy on Monday, two days before the annual meeting. This represented 1.9% of the company and about 5.3 times that day’s trading volume of Hanergy shares.

The stock exchange gives a loose definition of what it means to short a stock. The typical definition is to sell shares to bet on a decline. But the exchange also defines a short position as a case when a person is “under an obligation to deliver the underlying shares”—for example the pledge of shares for a bank loan.

Companies with concentrated share holdings are common in Hong Kong. Nearly 400 stocks, or around a fifth of all stocks listed in the market, have its major shareholder owning more than 60% of the company. The thin holdings among minority shareholders have fueled rallies on the way up but could also amplify falls on the way down.


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