China Stamps Out "Rat Traders" To Boost Stock Market Confidence

Tyler Durden's picture

The utilization of the Chinese market as both policy tool and 'wealth' creator - as The Fed has done with the S&P 500 - remains less than the PBOC would like. It appears the Chinese prefer their 'risk' in Baccarat and real estate and don't trust those stock markets shisters... so the government is doing something about it. While American investors have to worry about high-frequency traders front-running them; in China, it's a low-frequency trade called "rat trading" where fund managers use personal accounts to buy shares cheaply, then sell them at a profit after purchases from the funds they manage have boosted their value. China’s securities regulator has decided enough is enough and has stepped up its probe into insider trading, taking on “rat traders” in an attempt to restore confidence in the country’s stock market.

 

As The FT reports, insider trading is widely viewed as commonplace on China’s domestic bourses, in a market weighed down by poorly performing state-controlled companies... and the government has had enough...

China’s securities regulator has stepped up its probe into insider trading, taking on “rat traders” in an attempt to restore confidence in the country’s stock market, which is widely viewed as being rife with corruption.

 

Rat trading is a form of front-running in which fund managers use personal accounts to buy shares cheaply, then sell them at a profit after purchases from the funds they manage have boosted their value.

And they are serious...

The China Securities Regulatory Commission said it had uncovered evidence of criminal wrongdoing by five former fund managers at Shanghai-based HFT Investment Management, which is part-owned by BNP Paribas. The CSRC on Friday said that it had turned the cases over to police.

 

The CSRC has opened 25 insider trading investigations since the start of the year, up from 22 for all of 2013, and has referred 29 cases to police and prosecutors, up from 21 in 2013, according to data from the CSRC published in late June.

 

At least 178 fund managers have left their jobs during the first six months of this year, compared with 150 during all of 2013, according to an analysis of official figures by Z-Ben.

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The corruption probe appears to be showing results but for now the Shanghai Composite remains underwhelmed in terms of dragging investors back into the risk pool.

On a side note - if China can do this, why can't the SEC?