SHFE lifts abnormal trading exemption clause; seen as warning [UPDATED]

The Shanghai Futures Exchange (SHFE) will remove an abnormal trading exemption on hedging from Wednesday December 16, a move that was interpreted as a “warning” on recent rampant short-selling in metals.

The Shanghai Futures Exchange (SHFE) will remove an abnormal trading exemption clause on hedging from Wednesday December 16, a move that was interpreted as a “warning” on recent rampant short-selling in metals.

The SHFE has decided to stop practising an item in its provisional regulation on abnormal trading supervision, which says “self-closing, frequent trading applications/cancellations and applications/cancellations of huge values stemming from hedging are not regarded as abnormal trading”, according to a statement on its website on Thursday December 3.

“As a futures market self-discipline and supervision organisation, the SHFE has been carrying out its supervision responsibilities of market self-discipline [based] upon relevant rules, making risk-prevention and clamping down on behaviour that breaks laws and rules its priorities. We have zero tolerance on any illegal behaviour, and seek to create a good environment for market development, effectively protecting the fairness, openness and equality of the market, as well as protecting the legal interests of investors,” the SHFE said in an email to MB on Friday, as it replied on whether it is investigating or planning to probe “malicious short-selling” of metals as claimed by local smelters, or if it plans to ban any short-selling.

The timing of such a statement was subtle, as talks about regulatory investigations on “malicious short-selling” peaked in the previous week when metal prices tumbled across the board, amid joint production cut announcements and clamours for government intervention from local smelters.

“We read this statement as a warning to high-frequency traders,” an official at a major local smelter said, who condemned high-frequency trading and speculators for recent steep falls in domestic metals prices.

His interpretation of “warning” was echoed by another market source.

“This statement is interesting – it is vague, without any punishments on such trading behaviour. But it is a gesture or a warning, maybe to those doing high-frequency trading,” he said.

Yet, it is clear that “the SHFE doesn’t wan to panic the market, that’s not what it wants to see,” a third source said.

Others argue there is more to the statement.

“This [statement] may indicate the SHFE is under some pressure. By doing this, the SHFE is doing something that the top regulators can see. On the other hand, the SHFE is also warning the market – we are keeping an eye on you, so don’t do things too extremely,” a market source said.

While it is true that high-frequency trading can also be longs, “the country’s top regulators and the metals industry have different thoughts. Therefore, the SHFE needs to clarify its stance with such a statement, even though it knows clearly it [the recent falls in metals prices] is not just about high-frequency trading,” he said.

Metal prices barely budged on Friday morning, showing little influence so far from the statement.

And doubts remained on whether hedging activities can be completely identified or monitored.

“Hedgers can use different accounts instead of a single account to do the hedge trading, or even with individual accounts. How can this kind of trading be effectively identified at all?” one source said.

Similar concerns led the LME to launch its ‘commitment of traders’ report in August 2014, from where a breakdown of market participants can be clearly seen.

This article was updated at 10:45 Beijing Time to include comments from the SHFE.

Linda Lin

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