China's Coming For the Short Sellers

Reuters: China watchdog extends pursuit of short sellers to HK, Singapore - sources
China is pressing foreign and Chinese-owned brokerages in Hong Kong and Singapore to hand over stock trading records, sources said, extending its pursuit of "malicious" short sellers of Chinese stocks to overseas jurisdictions.

...It is common for regulators to request information from their overseas counterparts that may aid investigations at home. But it is highly unusual for the CSRC to seek information from offshore and international brokers directly, one source in Hong Kong said.

...The sources said the CSRC was focusing on trading positions taken through both the Shanghai-Hong Kong Stock Connect trading link and via offshore-listed products that track mainland stocks, including index futures and exchange traded funds (ETFs).

"There have been a number of questions over the past two weeks. They are going after any type of trading activity that has a reference to China," said an executive at an international brokerage based in Hong Kong.

One source at a mainland brokerage in Hong Kong said they had received enquiries over the phone directly from the CSRC seeking evidence of "naked shorting" - when an investor tries to profit from falling prices of a given stock without actually owning the shares necessary to complete the transaction, a practice that is restricted in most markets.

"We immediately said we have no clients doing 'naked shorting,' but they didn't believe us. They asked for our records on trades through the Shanghai-Hong Kong Stock Connect and records of short-selling index futures via QFII and RQFII."

Bloomberg: China Market Manipulation Probe Targets Spoofers After Crash
Spoofing has become the latest target in China’s campaign against stock-market manipulation after a $3.5 trillion selloff.

The practice, which involves placing then canceling orders to move prices, is suspected in 24 accounts on the Shanghai and Shenzhen stock exchanges, the China Securities Regulatory Commission said on its microblog. The bourses have restricted the accounts and regulators are investigating program traders, who have recently had an “obvious” impact on the stock market, the CSRC said.

China’s focus on spoofing follows a probe of “malicious” short selling, part of the government’s unprecedented effort to shore up investor confidence after a 29 percent tumble in the Shanghai Composite Index from its June high. Spoofing entered the popular lexicon this year after U.S. prosecutors said a London trader’s use of the strategy contributed to the flash crash in May 2010, when American equities briefly lost almost $1 trillion of value. The Shanghai Composite sank 8.5 percent on Monday, its biggest rout since 2007.

“The public isn’t happy about the market plunge so the regulator needs to take some actions as a response, and that’s part of the government’s plan to prop up the market,” said Zhang Haidong, the chief strategist at Jinkuang Investment Management in Shanghai. “Whether it’ll be effective remains to be seen.”

...Spoofing “works on the way up and the way down, so it’s interesting it’s only a problem when it causes equity prices to fall,” Every said. “I don’t think this changes the fundamental dynamic that price-to-earnings ratios are unrealistically high in a slowing economy where there are concerns over profits.”
This applies in more ways than one:

Thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother's eye.

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