No one expected that just three days after the Shanghai Stock Exchange 50EFT option trading was launched, people still cheered that the A-share market had entered the era of stock options, and a shocking "own order" incident broke out. Shortly after the market opened in the afternoon of February 11, the two contracts of SSE 50ETF for April 2400 and SSE 50ETF for April 2450 instantly plummeted to 0.001 yuan, a drop of 99%. Fortunately, options trading has only been open for three days, and there are very few participants. The linkage effect with the A-share market has not yet occurred, so it has not had any impact on A-share trading.

This option trading “own order” incident is of the same nature as Everbright Securities’ “8·16” own order incident. The latter was severely investigated because of its huge impact on the secondary market. The former It was downplayed because it had no impact on the secondary market. Mainstream securities media took the opportunity to praise the Shanghai Stock Exchange's stock options risk control system for its reasonable design and effective circuit breaker mechanism. In the author's opinion, the root cause of the "Oolong Order" incident is actually the failure to adopt foreign policies.

CITIC Securities escaped by chance

Let’s first take a look at the ins and outs of this option “own order” incident. At 13:03:12 on February 11, the two contracts that were originally trading sideways, SSE 50ETF Purchase April 2400 and SSE 50ETF Purchase April 2450, suddenly plunged. The former fell from 0.1006 between 13:03:10 and 13:03:12. Yuan fell to 0.001 yuan, and the latter fell from 0.0808 yuan to 0.001 yuan between 13:03:11 and 13:03:12, with a drop of 99% in both cases, triggering the circuit breaker mechanism. The main reason for the change in the contract was that the market maker CITIC Securities had an error in its quotation. During this period, it placed batch orders for the SSE 50ETF to purchase April 2400 and the SSE 50ETF to purchase April 2450 contracts. CITIC Securities declared 12 sell orders for the former contract, with declared prices ranging from 0.001 yuan to 0.0014 yuan (including 6 sell orders of 0.001 yuan), with 10 orders each, with a total of 120 orders and a total of 100 orders. Among them, the transaction price of 90 contracts was between 0.0988 yuan and 0.1024 yuan, and the transaction price of 10 contracts was 0.001 yuan. For the latter contract, 11 sell orders were declared, with a price of 0.001 yuan, 10 orders per order, a maximum of 110 orders, and a final transaction of 80 orders. Among them, 76 transaction prices were between 0.0798 yuan and 0.0828 yuan, and 4 transactions were at 0.001 yuan.

After the "own order" occurred, the circuit breaker mechanism was activated, and the trading mode of the two contracts was temporarily switched from continuous bidding to collective bidding. During this period, another market maker, Huatai Securities, actively quoted prices, while CITIC Securities urgently canceled other unfilled orders, allowing the contract price to quickly return to normal. It can be seen from this that the so-called circuit breaker mechanism actually suspends trading afterwards, allowing CITIC Securities time to withdraw orders, and allowing other market makers to play the role of heroes to save the United States. This move enabled CITIC Securities to avoid major losses, with initial losses estimated to be only about 10,000 yuan. If it weren't for the fact that the options trading market had just launched and the market size was extremely small, then CITIC Securities would not be so lucky. The reason why all the batch orders placed by CITIC Securities were not filled was entirely because the market did not accept the order, which was equivalent to hitting the lower limit. On the other hand, if the market size is large enough, then all these orders will be filled in an instant, just like Everbright Securities' "own order". No matter how much money is in, it will be swallowed up in an instant. What is the use of the circuit breaker mechanism at this time? You can’t just declare the deal void like the “3·27” Treasury Bond Futures Incident, right?

The circuit breaker mechanism cannot prevent problems before they occur

The "8·16" own incident of Everbright Securities was due to a problem with its independent arbitrage strategy system. Due to a flaw in the order generation system, the trader discovered that 24 individual stock declarations were unsuccessful and wanted to use the new function of "re-placement" of orders. Under the guidance of the programmer, he did not expect that this function had not been verified by the real market, and the program Buying 24 constituent stocks was written as buying 24 groups of 180ETF constituent stocks, and 26,082 unexpected market price orders were repeatedly generated in an instant. The order execution system failed to effectively verify and control the amount of available funds when placing market orders for high-frequency trading. The above-mentioned unexpected huge amount of market orders were sent directly to the exchange, which shocked the A-share market. This is how the "Single" incident happened. The details of CITIC Securities' own order incident are not clear, but it is obvious that there is a strategy system for batch operations, otherwise it would not have placed such a large number of sell orders knowing that the market had not taken over. This is a disaster caused by blindly copying some foreign strategy systems, adopting foreign concepts without adapting to them, and being superstitious about computers rather than trusting the human brain. It is now popular to hand everything over to computers, with passive mechanical enforcement, eliminating errors that may occur due to human subjective judgment. But it turns out that computers also make mistakes, and an error is often a systematic and subversive error, with no possibility of self-correction.

CITIC Securities’ “own order” incident did not have serious consequences. This is purely a fluke. If we downplay it, fail to profoundly summarize the lessons learned, and even indulge ourselves in the effectiveness of the circuit breaker mechanism, something will happen sooner or later. The option "own order" incident just proves that this circuit breaker mechanism is ineffective. An effective circuit breaker mechanism should be to block CITIC Securities' own order in time when it is about to come out.

The fact is that all the "own orders" of CITIC Securities have been released, and the transactions have been completed to the maximum extent. If the market size is large enough at this time, there will be no chance of remediation, as was the case with Everbright Securities' own incident. In view of this, all parties concerned should carefully investigate various strategic systems and cannot be superstitious about computers. People command computers, not computers command people, otherwise they will be disrupted.