'Mispricing' could cost Deutsche Bank over $1m

‘Mispricing’ could cost Deutsche Bank over $1m
By Goh Eng Yeow, Markets Correspondent

DEUTSCHE Bank could lose more than $1 million after a bungle that underpriced a keenly-awaited new warrant being sold to Singapore investors.

The bank suspended trading of the warrant – issued on Hong Kong-listed China Railway – from 9am yesterday, and it might ask the Singapore Exchange (SGX) to cancel the mispriced trades.

Traders said, however, that should the SGX decline to do so, Deutsche Bank’s losses could well exceed $1 million.

Deutsche Bank announced yesterday afternoon that trading in the warrant would resume at 9am tomorrow.

The bank’s call warrant on China Railway started trading on Monday last week, two weeks after the stock started trading in Hong Kong. Holders can use one warrant to buy two China Railway shares at HK$9.50 each. The warrant expires in June this year.

One dealer said, based on China Railway’s close of HK$10.74 last Friday, the warrant should now be worth over $1, given its long period before maturity.

UNDERPRICED ISSUE
The new warrant was issued by Deutsche Bank at 78.7 cents apiece. It closed last Friday at 77 cents on a heavy volume of 10.65 million shares, after it gained 44.5 cents from Thursday’s close of 32.5 cents.

Deutsche Bank said trading in the warrant was suspended pending the resolution of error trades – ‘due to significant mispricing on its part in the warrant’.

Dealers contacted by The Straits Times believed the warrant attracted heavy trading last Friday, as traders became aware of the serious mispricing. ‘Deutsche Bank will be making a big loss if the bulk of the 10 million warrants was sold by the bank,’ said a remisier.

Still, many were amazed that errors in pricing the warrant went undetected for two days.

‘When Deutsche Bank announced that it was launching the new warrant, it clearly stated that the issue price was 78.7 cents,’ said a market observer.

Warning bells should have been sounded when the warrant was trading at only 32.5 cents last Thursday, even though China Railway’s share price was surging at the time, he added.

Given the two currencies involved, the error could have been caused by a Deutsche Bank trader entering the wrong conversion price into a pricing model.

Still, unless the SGX allows Deutsche Bank to cancel the error trades, there is nothing much the bank can do. ‘There is a consultation paper to give the SGX the power to adjust the transacted price of the trade, rather than cancel them outright, but this policy has not been implemented yet,’ a banker said.

Some traders are also wondering if it is advisable for a warrant issuer to suspend trading of a warrant simply because of error trades.

Deutsche Bank’s warrant mispricing follows error trades at other warrant issuers.

Societe Generale apparently had to pay millions three years ago when a wrong keystroke sent shares of and warrants on Total Access Communications into a tailspin. Last year, DMG & Partners stopped online warrants trades completely, after an Internet trader nearly lost $426,000 on a warrant sale.