(July 7): China’s securities watchdog said it is paying close attention to a legal case brought by Susquehanna International Group against alleged insider traders, after the US market maker said regulatory officials may have been involved in the trades.
The China Securities Regulatory Commission (CSRC) stopped short of signalling any domestic probe into Susquehanna’s claims that insider traders profited from bearish bets on brokers Futu Holdings Ltd and Up Fintech Holding Ltd ahead of a regulatory probe in May. But the CSRC said it would pay close attention and “carry out the relevant work” in line with circumstances.
The response came after Susquehanna won a legal request in the US for Futu, Up Fintech and Interactive Brokers Group Inc to freeze the accounts of traders who made options bets ahead of a Chinese government crackdown on overseas trading. Susquehanna said in its complaint that the information may have come from Chinese securities regulators or the employees of Futu or Up Fintech.
The legal case underscored how China’s sweeping regulatory moves — which are often announced by multiple government departments simultaneously — can roil overseas markets and leave global firms on the hook for losses. This week, Citadel Securities LLC said it was also the victim of the same alleged insider-trading scheme.
“China’s securities regulators and other relevant authorities have established rigorous internal control and management systems,” the regulator said in an emailed statement. “The trading activities referenced in the lawsuit occurred in the US market and are therefore subject to applicable US laws and regulations.”
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The CSRC said it notified Futu and Up Fintech before its penalty against them was made public. It added that the move had been anticipated by market participants for a long time, and pointed to a 2022 move against the brokers that made clear it was taking so-called rectification measures.
Susquehanna, a major liquidity provider in the US equity options market, told a Manhattan Federal Court last week that it was the counterparty of alleged insider trades that generated more than US$70 million ($90.4 million) in profits. The firm said traders on the other side of the transactions had bought put options on the shares of Futu and Up Fintech in the two weeks before the May 22 regulatory announcement.
Citadel alleged this week that the trades yielded closer to US$137 million and is seeking to join Susquehanna’s lawsuit, saying it lost about US$28 million as the “victim of a brazen insider trader scheme”.
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On May 22, China’s central bank, its public security ministry and six other government bodies released a statement pledging to crack down on illegal offshore trading. The securities regulator then announced specific penalties against Futu, Up Fintech’s Tiger Brokers and Long Bridge Securities Ltd, an unlisted firm. When the stock prices of Futu and Up Fintech plunged on the news, the traders allegedly made huge profits.
There was “powerful evidence” the traders were using material non-public information to inform their well-timed bets, Susquehanna alleged. It said the tips could have come from Chinese securities regulators or personnel at Futu or Up Fintech.
The US Securities and Exchange Commission is looking into Susquehanna’s allegations, although the scope of its probe wasn’t immediately clear. Its reviews can end without any enforcement action being taken. The Justice Department is also examining the trades.
A representative of Futu said the firm was aware of the court proceedings and taking appropriate steps in response. Up Fintech didn’t initially respond to requests for comments on the case.
Put options
Put options give investors the right to sell stock at a set price sometime in the future. Puts that are deeply out of the money — meaning their strike price is far below where the market is trading — can soar in value during periods of heavy selling.
The traders made profit of more than US$100 million from the options bets, after an initial outlay of around US$12 million, Susquehanna said.
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The firm gave an example it said occurred two days before the regulatory announcement: A trader bought options to sell Futu’s stock at a price of US$102.45, despite the stock trading above US$124. At the time, the options — which were due to expire on May 29 — were worth only around US$1.50. Their price jumped as high as US$14 on May 22, according to data compiled by Bloomberg.
China’s campaign against illegal cross-border trading in May was just the latest step in its growing attempt to target overseas assets.
The move started when eight Chinese government departments released a joint plan pledging to dismantle unauthorised offshore investment services and ramp up scrutiny on banks and other firms. The CSRC, the People’s Bank of China and the Ministry of Public Security were among the departments involved.
Around 10 minutes later, the securities regulator announced specific penalties against Futu, Up Fintech’s Tiger Brokers and Long Bridge for operating on the mainland without a license. Hong Kong regulators soon followed, saying they would toughen rules on accounts for mainland Chinese investors
The selloff in Futu’s share price wiped out around US$1.7 billion of wealth for its founder Leaf Li in a single day. The shares of Futu and Up Fintech still haven’t recovered.
Uploaded by Tham Yek Lee
