2015-05-28

Margin Call Clips A Shares, But Absolutely Not Insider Trading

Barron's: China Stock Meltdown and Inside Information
Some investors apparently had inside information about China’s brokerage firms preparing to clamp down on margin accounts. That crackdown was credited with helping torpedo Chinese stocks Thursday.

These investors pre-positioned for Shanghai’s stock market to decline by buying bearish put options on a major U.S. exchange-traded fund that tracks China’s stock market.

They are now counting their profits with glee. Some of the put options bought Wednesday have today nearly doubled. The investors profited by knowing that efforts to limit margin lending — investors borrow money from brokerage firms to buy stocks — would dramatically disrupt China’s stock market.
This isn't insider trading, for the same reason there isn't insider trading in currency markets: there are too many factors in play.

China markets plunge in record turnover as margin traders take fright
On Thursday morning at least three Chinese brokerages, including Guosen Securities Co (002736.SZ), Southwest Securities Co (600369.SS) and Changjiang Securities Co (000783.SZ) said they would tighten margin requirements.

"The brokerages are front running what the regulator wants to do," said Bernard Aw, an analyst at ING Markets in Singapore.

Haitong Securities (600837.SS) and GF Securities (000776.SZ) had made similar moves earlier in the week.

"This is no longer an individual case, but an industry-wide campaign," said Zhang Chen, analyst at Shanghai-based hedge fund Hongyi Investment. "Clearly, they got guidance from regulators, and this shows a change of government's attitude toward the margin trading business."

Here why it's not insider trading at all in this case. The change at GF and Haitong was announced on Tuesday morning Eastern USA time: 海通和广发证券上调两融业务融资保证金比例. The time stamp on the story is 2015-05-26 22:11:00.

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