China’s Equity Futures Volume Drops 99 Percent

In this morning's Bloomberg.com article titled "China Just Killed the World's Biggest Stock-Index Futures Market,"  reported that

"Volumes in the country’s CSI 300 Index and CSI 500 Index futures sank to record lows on Tuesday after falling 99 percent from their June highs. Ranked by the World Federation of Exchanges as the most active market for index futures as recently as July, liquidity in China has dried up as authorities raised margin requirements, tightened position limits and started a police probe into bearish wagers."

Earlier, China restricted selling individual stocks, but that was not enough to stop the bloodbath. It was far too easy to just sell equity futures instead. Raising margin requirements was expected, especially given the increase in volatility, but "police probes into bearish wagers?" Really? That would certainly reduce selling.

In addition, Kim also reports that The China Financial Futures Exchange now labels a position of more than 10 contracts on a single index future as “abnormal trading.” It is no surprise that volume dropped by 99% in a little over a month. Are these the actions of a country with annual GDP growth of 7%?

Price is one of the most efficient information discovery mechanisms ever created - provided that exchanges are free from outside influence. In the current manipulated environment, market prices in China are meaningless. It is far more instructive to focus on China's desperate actions instead. Every extreme step that China takes to intervene in its equity markets further undermines both its credibility and the world's confidence in China's economy.

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About Brian Johnson

I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers. I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies. In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years.
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