Curiouser and Curiouser

Generali

A month or so ago a new stock was launched on the Chinese
(Shenzen) stock exchange. The price is up by 1600% which is quite a lot by any standard. The unusual thing is the chart of the price:



As you may be able to see, the stock jumps up each day in price and then flattens out. This has happened each and every day since the stock was first launched (the IPO).

This begs the obvious question, Why? Is it some kind of market manipulation to push the price up overnight each night? Nope, not even close.

The Shenzen market has a rule where if a stock increases in price by 10% in a day then trading is suspended for the rest of the day. This is quite a sensible rule which is in place to ensure an orderly market.

Beijing Baofeng Technology Co. Ltd's share price is increasing by 10% each morning first thing and then gets suspended so can't increase any more hence the weird graph.

Market cap is now CNY8.7bn having been CNY865mn a month ago. Chinese GDP is about CNY64,000bn. If it keeps rising at this rate, the stock will be worth more than the whole of Chinese GDP within 2 years!!!

kinger101

It's a bubble. The people buying the stock have no interest in the underlying value of the asset. They just hope they're not holding the stock when it bursts. Tulip mania.

chewmylegoff

I think it's a pretty odd rule really. The market should be able to go into auction and then the stock could find its level. Other stock markets have similar rules though, it is arguably even sillier in reverse as it can take many days for a stock to adjust to really bad news. This happened to a stock called gitanjali gems on one of the Indian markets where it fell 10% a day for ages. Just means no one can trade the stock whilst it is going through this prolonged controlled fall.

The 10% rule works against the interest of the operator of the market (cos no volume so they make no money) and investors who cannot buy or sell the stock. It doesn't ensure an orderly market at all - an orderly market is one where the share price is freely allowed to react to good or bad news.

Generali

chewmylegoff wrote: »

I think it's a pretty odd rule really. The market should be able to go into auction and then the stock could find its level. Other stock markets have similar rules though, it is arguably even sillier in reverse as it can take many days for a stock to adjust to really bad news. This happened to a stock called gitanjali gems on one of the Indian markets where it fell 10% a day for ages. Just means no one can trade the stock whilst it is going through this prolonged controlled fall.

The 10% rule works against the interest of the operator of the market (cos no volume so they make no money) and investors who cannot buy or sell the stock. It doesn't ensure an orderly market at all - an orderly market is one where the share price is freely allowed to react to good or bad news.

The problem really comes, for me, from the idea that the stock should start at the same price as when it was suspended. The whole point of suspending a stock in a disorderly market is because price discovery has failed.

Generally, most markets start with an opening auction: buyers and sellers put in bids as to what they are prepared to pay for a stock. Any orders that match (sell price = buy price) are turned into a trade. That then sets the price of the stock, the market opens and off you go.

Let's take an example. Chewmylegoff Oil (ticker: CMLO), a FTSE100 company, announced a major oil find but it turned out that they'd drilled into a petrol storage container under the local Shell garage so put out an RNS (news statement) to the market saying the multi-billion dollar discovery was actually worth ten grand and was already owned by Shell.

The stock goes into freefall and so is suspended by the LSE when the price fell from 120p to 114p (a 5% share price change from the opening price triggers the 'circuit breaker'). A quick investigation shows that this was a genuine error so the stock goes back into the following morning's auction.

At the auction the next day, the price discovery mechanism shows a price of 80p/share. That is well below the previous close of 114p but that's okay. We've got price discovery as a result of the currently available facts and the stock trades on as normal.

All we need to do now is to find out why zag, HAMISH and viva (CEO, CFO and Chairman) decided to sell out a huge chunk of their shareholdings a week earlier at 130p/share!

Jonbvn

Generali wrote: »

A month or so ago a new stock was launched on the Chinese
(Shenzen) stock exchange. The price is up by 1600% which is quite a lot by any standard. The unusual thing is the chart of the price:

As you may be able to see, the stock jumps up each day in price and then flattens out. This has happened each and every day since the stock was first launched (the IPO).

Apparently, every one of the 29 IPOs in Shanghai and Shenzhen this month have risen by the daily limit each day since.

Something really fishy here.

http://www.bloombergview.com/articles/2015-05-01/risky-debt-and-perfect-stocks

buglawton

The Chinese stock market and investors seem to have a need to remake all the mistakes of hundreds of years of western stock market history and then relearn the same solutions.

Generali

Jonbvn wrote: »

Apparently, every one of the 29 IPOs in Shanghai and Shenzhen this month have risen by the daily limit each day since.

Something really fishy here.

http://www.bloombergview.com/articles/2015-05-01/risky-debt-and-perfect-stocks

So the business model for the fund is:

1. Take money in from investors (completely normal practice)
2. Use that money as a 'deposit' to borrow money from a bank or something (common practice)
3. Use the fact that the fund owes a bank or something a large amount of money to stiff the bank: tell them, 'Yeah we borrowed $1bn but we're only paying back $900mn.' (irregular practice but legal)
4. Have structured the fund/loan in advance to make it hard for the bank to do the normal thing and sue the bejesus out of you as debt holders normally get paid before equity holders (clever although morally dubious and legally unlikely).
5. Have the whole thing go to court and see who is better at contract law, the fund or the bank-type entity.

It really is an utterly ingenious idea. Ignoring the moral aspect for a moment, it's amazing. Setting up a fund whose USP is stiffing creditors. Of course unit holders (investors) are kinda like creditors too so there is a big fat flashing light marked caveat emptor above this. Still 10/10 for ingenuity.

The management company will be taking fees throughout this. In the end it doesn't matter to them whether they can advance equity holder claims in advance of debt holder claims as if the whole thing goes [lady chest] up then the managers walk away with the management fees and the investors lose everything. I suspect that's the most likely outcome.

Generali

buglawton wrote: »

The Chinese stock market and investors seem to have a need to remake all the mistakes of hundreds of years of western stock market history and then relearn the same solutions.

The solution of having a circuit break at a 10% rise is perfectly reasonable and starting the price the following day, while not the ideal model IMHO, isn't corrupt or flagrantly stupid.

Fundamentally the problems lie with the investors. If you are prepared to pay this sort of money for a company with nil earnings, no dividends and for a company that doesn't even seem to have an investor relations website then you deserve to lose your shirt.

For every Google there are a thousand pets.com or boo.com example.

purch

Generali wrote: »

The unusual thing is the chart of the price:

Stairway to Heaven :eek:

HAMISH_MCTAVISH

Generali wrote: »

All we need to do now is to find out why zag, HAMISH and viva (CEO, CFO and Chairman) decided to sell out a huge chunk of their shareholdings a week earlier at 130p/share!

Love to tell you old boy but I'm a tad busy sipping large fruity drinks with miniature umbrellas in them on a warm beach somewhere.

chewmylegoff

Generali wrote: »

The problem really comes, for me, from the idea that the stock should start at the same price as when it was suspended. The whole point of suspending a stock in a disorderly market is because price discovery has failed.

Generally, most markets start with an opening auction: buyers and sellers put in bids as to what they are prepared to pay for a stock. Any orders that match (sell price = buy price) are turned into a trade. That then sets the price of the stock, the market opens and off you go.

Let's take an example. Chewmylegoff Oil (ticker: CMLO), a FTSE100 company, announced a major oil find but it turned out that they'd drilled into a petrol storage container under the local Shell garage so put out an RNS (news statement) to the market saying the multi-billion dollar discovery was actually worth ten grand and was already owned by Shell.

The stock goes into freefall and so is suspended by the LSE when the price fell from 120p to 114p (a 5% share price change from the opening price triggers the 'circuit breaker'). A quick investigation shows that this was a genuine error so the stock goes back into the following morning's auction.

At the auction the next day, the price discovery mechanism shows a price of 80p/share. That is well below the previous close of 114p but that's okay. We've got price discovery as a result of the currently available facts and the stock trades on as normal.

All we need to do now is to find out why zag, HAMISH and viva (CEO, CFO and Chairman) decided to sell out a huge chunk of their shareholdings a week earlier at 130p/share!

The LSE wouldn't wait until the next morning would it? If an RNS was released intraday with a material piece of news in it an auction would be triggered straight away. The 'circuit breaker' isn't there to stop the stock falling on bad news but to stop things like a flash crash caused by someone's crazy untested algo.

The last question is easy to answer. They all approved each other's dealings in line with the model code's "exceptional circumstances" provision because they were all going to buy a house at auction and needed the money to fund the purchase. Unfortunately they all got outbid so didn't buy the house. Damn!