Hundsun halts new account openings after probe

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.