China targets spoofing in latest crackdown on stock manipulation

The practice of spoofing, which involves placing then cancelling orders to move prices, is suspected in 24 accounts on the Shanghai and Shenzhen stock exchanges.
The practice of spoofing, which involves placing then cancelling orders to move prices, is suspected in 24 accounts on the Shanghai and Shenzhen stock exchanges.PHOTO: EPA

SHANGHAI (BLOOMBERG) - Spoofing has become the latest target in China's campaign against stock-market manipulation after a US$3.5 trillion (S$4.81 trillion) selloff.

The practice, which involves placing then cancelling 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 per cent tumble in the Shanghai Composite Index from its June high. Spoofing entered the popular lexicon this year after US prosecutors said a London trader's use of the strategy contributed to the flash crash in May 2010, when American equities briefly lost almost US$1 trillion of value. The Shanghai Composite sank 8.5 per cent 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."

Spoofers make money by feigning interest in buying or selling at a certain price, creating the illusion of demand in an attempt to make other traders move the market. The spoofer cancels the original order and buys or sells at the new price to make a profit.

"It certainly looks like spoofing is at play here," said Bernard Aw, a strategist at IG Asia Pte Ltd. in Singapore. "Given that this practice is seen as market manipulation, it is not surprising to see CSRC stepping in."

While such trading may have contributed to recent declines in Chinese stocks, the main driver is probably a pull-back by leveraged investors, said Zhang. Outstanding margin debt on mainland bourses has tumbled about 40 per cent since mid-June, according to data compiled by Bloomberg.

The focus on market manipulation does not alleviate concern that Chinese shares are too expensive, said Michael Every, the head of financial markets research at Rabobank Group in Hong Kong. The median stock on mainland bourses trades at 66 times reported earnings, higher than in any of the world's 10 largest markets, according to data compiled by Bloomberg. That compares with a multiple of 13 in Hong Kong.

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."