The Legal Regulation Of Securities Trading Anomaly

After decades of development, the securities market has evolved into a huge highlytechnical, complicated and sensitive system. In addition to force majeure, accidentsand other traditional risk factors affect securities trading, increasing technical failureand human error such as "fat finger" events, etc., have become the main reason for thesecurities trading anomalies, which cause serious damage to the function and order ofsecurities market. A severe challenge that the legal system of securities market andregulatory agency has to face under the new circumstance is how to find an effectiveway to prevent and regulate securities trading anomalies, so as to maintain an open,fair and justice market and safeguard investors’ legitimate rights and interests.This is a worldwide difficult problem. In the eyes of the law, there is a series ofserious problems with important theory value and practical significance we need tosolve, such as how to recognize and treat the risk nature of securities tradinganomalies correctly, how to reasonably design regulatory measures, how to efficientlyallocate risk and responsibility during securities trading anomaly and its disposalprocess, how to balance and coordinate different levels of demand and value targetarise out of different stakeholders, and finally how to ensure that the prevention andregulation of securities trading anomalies can be proceeded with legitimacy, rationality and certainty under the legal framework.This paper, in the perspective of legal regulation, takes the disposal and regulation ofsecurities trading anomalies as a basic analysis framework, discusses and expoundsthe forms, causes, self-regulation, external supervision and responsibility distributionof securities trading anomalies, analyses abundant typical cases both in Chinese andforeign securities market, takes a deep insight into the fundamental, critical legalissues of securities trading anomalies, and then puts forward concrete suggestions toimprove the legal system in this area.The full text consists of an introduction, five main chapters. The first chapter is anoverview of securities trading anomalies. The second to the fifth chapters relate andanalyze from four points, namely the self-regulation, administrative supervision, civilliability and system improvement. There are about220,000words in the full text.The first chapter is "A Multidimensional Perspective of Securities TradingAnomalies". To facilitate the reader to form a preliminary understanding of thisrelatively new field, this chapter tries to describe "what happened" as an anomalyduring the securities trading. In an attempt to present a stereo image and lay afoundation for subsequent analysis and interpretation, this chapter introduces andreviews the securities trading anomaly from various angles, includes the marketenvironment from which it happens, the pattern of its performances, the causes andhazardous.Securities trading anomalies, as a concept, comes from the generalization andsummarization of the actual situation on the market, has not yet formed a systematicand completely consensus. With numerous patterns of performances, there are anumber of different starting points to understand securities trading anomaly. Startingfrom the purpose of this study, it is necessary to both understand its basic featurethrough its performance and analysis it thoroughly from a legal angle. This chapter first gives a brief introduction to the basic characteristics of the stockexchange market, then points out the endogenous characteristics of securities tradinganomalies. To move forward, this paper takes the analysis frame established by themarket rules of stock exchange which gives direct definitions and regulatory rules tothe securities trading anomalies, and classifies them into several patterns with manyexamples. A preliminary conclusion is that the securities trading anomaly is anabnormal state of securities trading, it may happen during the process of securitiestrading, causes all or part of the trading cannot be carried on smoothly, yet can also bereflected on the trading results, makes the trading results beyond people’s realintention.The second step to understand securities trading is to deeply analyze and classify thecausing reasons. As highly technical relevant and with large-scale, the stock markethas become a highly complicated and sensitive system. Anomalies can be triggered byany single and tiny cause, and these complex and diverse causing reasons needs to beclassified into certain types through an appropriate perspective. In order to establish alegal analysis frame for the later analysis of disposal measures and civil liability ofsecurities trading anomalies, this chapter chose to divide the causes into two types asthe external and internal causes. The external causes are divided into force majeureand third party reason, while the internal causes are divided into technical failure andhuman error.The third step to understand securities trading is to analyze the danger andharmfulness of securities trading anomaly based on its risk features. Securities tradinganomaly can obviously cause serious damages to the stock market, first of all, itdestroy the continuity and stability of the securities trading, thus directly damage thesecurities market liquidity, blocking the realization of functions of stock market suchas to matchmaking trading and price discovering. Another adverse effect of securitiestrading anomaly is aggravate the inner risks of securities trading. Due to theautomation, electronization and technicalization of modern securities trading, as well as the openness, high relevance of securities market, the securities trading anomalyshows the characteristics of high conductivity. The adverse effect can be spread to thewhole market in a very short period right after it occurred. Besides, anomalies areoften associated with wild market volatility, endangering the stability of the market,damaging the confidence in the market, and even cause negative impacts to the socialproduction, consumption, savings and investment activities. Finally, securities tradinganomaly may cause different levels of damages to inverters’ interests. Beyond thedirect property loss suffered by certain directly evolved investors, there are stillindirect loss as the anomaly may exacerbate the inequality of market position due tothe information asymmetry, the different level of ability of small and medium-sizedinvestors to recognize and bear the risk.The second chapter is "the Self-regulation of Securities Trading Anomalies". Thischapter, from the aspect of legal requirements, comparative advantage and intrinsicmotivation, discusses the reasons why self-regulation becomes the dominant model tohandle the securities trading anomalies. Take fairness and order as the main target ofsecurities market, the paper points out the value orientation and basic requirement ofself-regulations of securities trading anomalies. On this basis, combining with specificcases, this chapter respectively discusses measures oriented to the order value andfairness value.Securities trading anomalies cause damages to the securities trading order, while thestock exchange, as the organizer and regulator of stock market, aims to maintain anorder and fair market. This explains why stock exchange should stand in the first lineto handle with securities trading anomalies. Besides, huge harmfulness and highconductivity of securities trading anomalies, requires the market regulator react as fastas possible, in this regard, compares to administrative regulation, self-regulation hasobviously comparative advantages. In the other hand, stock exchange itself hasintrinsic motivation to handle with securities trading anomalies properly in order tomaintain its credibility as well as the size of the market. The primary function of a stock exchange is to provide a fair, orderly and efficienttrading market for all the listed securities, and takes responsibility to maintain themarket order and public confidence. It is very critical to answer the questions of howto define the role and responsibility of the stock exchange when regulating securitiestrading anomalies, and how to determine the most significant value orientation amongnumerous value goals in the stock market. The stock exchange maintains the order ofsecurities trading by taking disposal measures to securities trading anomalies, whichdirectly affects the market participants’ interest, and involves the balance andcoordination of interests between individual participants and different interest levelsof market entities. From this point of view, stock exchange can only implementmoderate intervention in order to maintain a fair and order market, and all themeasures it taken must be based on laws and rules. As to the anomalies that neitherdirectly involves the market functions of discovering price nor the public interest, it isappropriate to leave them to the market participants’ autonomy of will, to achievedisposal results that satisfied the parties involved.To design and use specific measures to disposal securities trading anomaly, it isimportant to match the degree of its performance and damage, and also keep balancebetween maintaining the market order and efficiency. As to the anomaly that happensduring the process of securities trading, the key point of relevant measure is tomaintain the trading order, by giving the market participant a reasonable period tocalm down, to prevent them react to the anomaly in an irrational state. As to theanomaly that reflects in the results of securities trading, the main principle ofrelevant measure is to maintain both the market order and fairness, to avoid thepursuit of absolute transaction security, and damage the equity and fairness of thesecurities market.Among all the disposal measures, the error-trade policy is the most closely watched.Although securities trading processes in a standardized way and thus reflects a strongcharacter of irreversibility, but the declaration of will is still the core of the securities trading contract. When the trading results is not consistent with the real intention ofinvestors, conform to the gross misunderstanding or show the case such as unfair,constitutes gross misunderstanding or obvious unjust and damages the order, fairnessand public interests of stock market, whether to allow to cancel the trading contract,intuitively reflects the different value targets in different stock markets. It isimportant and common for a market to make error-trade policy based on its marketenvironment, structure and trading rules, and give specific rules regard to standardsof error trade, the terms, conditions and procedures of cancelling error trades.Securities trading anomalies happen everywhere regardless of market border andmaturity, but the disposal measures rare under different market circumstances anddevelopmental stages. By comparing the disposal measures to the “flash crash” and“fat finger” which are very close and familiar to market participants, this chaptershows that there is no fixed model to handle with securities trading anomalies, on thecontrary, it has to be adjusted flexibly with comprehensive consideration of severalaspects such as market environment, supervision target, investors structures, etc.This also proves that it is necessary and reasonable to give the stock exchangecertain discretion when regulating securities trading anomalies.The third chapter is “the Administrative Supervision of Securities TradingAnomalies”. This chapter emphasizes the necessity of administrative supervision insecurities trading anomalies through the presenting of the market failure caused bymarket participants’ profit motive and the self-regulation failure caused by stockexchange’s structural conflict of interest, then points out that the top principle ofadministrative intervene is to protect and maintain public interest in the stockmarkets. This chapter also discusses the goals and approaches of administrativeintervene as well as advanced experience in supervising securities trading anomalies.In what respect does the necessity of administrative supervision reflect in an marketdominated by self-regulation? As a kind of common risk in the securities markets,securities trading anomalies reflect the self-benefit choice of market participant between the market efficiency and safety. An outstanding performance is theprogram trading which combines highly advanced trading technology andmechanism. It brings both positive affect as greatly improving the trade efficiencyand negative affects as profoundly changing the market structure as well as hugethreaten to the stability of the stock market. In the other side, stock exchanges arefacing growing structural conflict of interest under the background of governancereforming and intensified market competition. All of these show the necessity ofadministrative intervene under the premise that follow the general rules of securitiestrading and in accordance with the law, regulations and rules in the stock markets.The key goal is of course to maintain the public interests among all the conflictinterests.Administrative supervision then plays an important role in regulating securitiestrading anomalies, and the awareness of the public interest in stock market areconstantly developing. The goal of the policy has expand from the originalmaintaining an fair, orderly market and eliminating the information asymmetry, toa comprehensive goal contends improving the efficiency of the market, meeting thedemand of diversification, and reducing systemic risk. By making access conditions,industry standards and regulations and rules, and following up, monitoring andassessing the disposal process of securities trading anomalies, administrativesupervision has covered all the steps of regulating securities trading anomalies suchas preventing, disposing, investigating and punishing.The administrative intervene in securities trading anomalies should also be kept in areasonable range and adhere to a good concept of regulation. For example, other thangive up eating for fear of choking, we should remain an open and pragmatic attitudeto the trading technology innovation as well as its external effects; as to theself-regulation failure, besides regulating the interest imbalance behavior insecurities trading anomalies, we should also pay attention to straighten out therelationship between the self-regulation and administrative supervision, respect and safeguard the comparative advantages of securities exchanges’ self-regulation. Inorder to highlight the issue, this chapter summed up some experience from theoverseas markets by analyzing three typical cases involved in the administrativesupervision of securities trading anomalies.The fourth chapter is “the Civil Liability In Securities Trading Anomalies: TheAnalysis of the Core Subject and Key Areas”, aims to answer the most concernedand controversial question in the practice area of stock market. Through in-depthanalysis of dual attributes of self-regulation organization and its functions, as well asthe publicity of stock market, this chapter argues the legitimacy foundation ofreasonable limiting the civil liability of securities exchanges in securities tradinganomalies and its disposal process based on the general theory of civil law as well aseconomic law. This chapter also analyzes, compares and responses to the civilliabilities of other trading service providers and especially in securities tradinganomalies caused by technical failures.It is also a process of balancing of interests for the distribution of civil liability,which involves the measure of individual interests and public interest, and also thecurrent interests and long-term interests. As mentioned in the first chapter, securitiestrading anomalies do huge damages to the stock market, and the subjects had beenaffected may beyond the scope of reasonable calculation and evaluation, which meanthat the determination and distribution of liability is related to the vital interests ofthe participants involved. The civil liabilities in securities trading anomalies can beanalyzed from various angles, and the key point lie in the imputation principle andthe criterion of liability regarding specific entity.Among all the trading service providers, the stock exchange is at the core and hasvery special role definition. Form this point of view, this chapter mainly focuses onthe role and liability of the stock exchange. With both public and commercialfunctions, stock exchange bears dual task of providing trading service and organizingsecurities trading. The centralized trading service has the nature of private products and public product, while the cost and risk of Public product should be shared by thebeneficiaries, in stock market, means all the participants. On the basis of obeying thecivil liability imputation principle in civil law, it is necessary to look beyond thegeneral view of private law to the distribution of civil liability in stock market. As tothe liability of the stock exchange when providing trading service, it is reasonable toadhere to the imputation principle of "intentional misconduct or gross negligence";as to the liability of the stock exchange when organizing and regulating the stocktrading, the general principle is to give the stock exchange the regulatory liabilityexemption, which means the stock exchange is free of liability in its goodwillperformance of the self-regulation of the stock market, only when there is"intentional misconduct or gross negligence" should the stock exchange take relevantliabilities.Through the business chain of securities trading, there are other entities that bearlegal or contractual obligations, such as the securities registration and clearinginstitutions, security companies, information and technology outsourcing companies(the third-party provider), etc. These entities bear different level of civil liabilitiesdue to their own role and responsibilities in securities trading. As to the securitiesregistration and clearing institutions, which functioned as the back-office system ofthe stock exchange by providing registration, custody, clearing and settlementservices for market participants, also has the nature of public product, justified itselfsuitable for the imputation principle of "intentional misconduct or gross negligence".Among all the types of causes, technical failure is a kind of relatively special type.Its particularity exists in two aspect: on the one side, it is the most frequent reasonthat cause securities trading anomalies, on the other side, it shows a highly complexand professional field that it is difficult for the general public to make objectivejudgments. The particularity also make the civil liability in this area remains a highlyconcerned but vague status for a long time. Through the comparative analysis of civilliability system in this area in different countries and regions, help us to understand the reasons and considerations behind specific policy, and form our own judgments.The fifth chapter is “the Improvement of the Legal Regulation of Securities TradingAnomaly: Centering on the Modification of The Securities Law”. This chapter firstcombed the existing legal system towards securities trading anomalies, and thenemphasis on how to improve the legal regulation of securities trading anomalies withspecific suggestions to modify certain provisions in the Securities Law and severalsuggesting plans to improve the supporting mechanism.Although the securities law system in China has already made some efforts toregulate certain types of securities trading anomalies, but there is still an obviousdefect that it is disjointed with market practice. With regard to the frequency andvariety of securities trading anomalies as well as the regulating and disposalmeasures, the laws have been far behind the market practice. A direct consequence ofthis status is that the market behaviors are subject to the lack of legal basis, thus leadto a lot of uncertainty to the market anticipation and the legal effect of certainmeasures taken to handle with securities anomalies, and finally affect the orderlyoperation of securities market.From the analysis of the first few chapters, the most important step to improve thelegal regulations for securities trading anomalies is to establish a relative completeframework for the legal regulation by supplementing and adjusting relevantprovisions in the Securities Law, so as to provide effective support and guidance forthe administrative regulations as well as market rules. Currently, the amendment ofthe Securities Law has been put on the agenda. The China Securities RegulatoryCommission, according to the requirements of the legislative planning, has alreadyproposed to add the amendment of the Securities Law into the2014annual plan oflegislative work of the National People’s Congress, and leading the preparing workof listing requirements and drafting amendment suggestions, which includes thelegal regulation of securities trading anomalies as one of the emphasizes. To perfect the relevant provisions of the Securities Law, we can design amendmentsuggestions from the following aspects: the first is to supplement the types anddisposal measures of securities trading anomalies, which refers to the amendment ofarticle114; the second is to establish the framework for the error trade policy, whichrefers to the adjustment of article120; the third is to add a new article to emphasis onthe prevention of conflicts of interest of the stock exchange and safeguard theleading position of public interests during the disposal and regulatory process ofsecurities trading anomalies; the forth is to add a new article to provide exemptionfor civil liability to goodwill regulatory behaviors conducted by the stock exchange.Beyond but based on the Securities Law, it is necessary to establish and improve asupporting legal mechanism to regulate securities trading anomalies. This chapter,form the three aspect of administrative regulations, stock exchange rules andbusiness contracts, put forwards concrete suggestions on detailing the industrystandards on the prevention and disposal of securities trading anomalies, specifyingthe types and procedures of disposal measures and establishing contractarrangements of distributing risk and responsibility of securities trading anomalies.