□ SSE Investor Education Center
The warrant market in mainland China has created miracles. Since the first Baosteel warrant was listed in August 2005, 40 warrants have been listed successively, including 22 call warrants and 18 put warrants. As of October 31, 2007, 40 warrants had created a total transaction amount of 9167 billion. However, the road of development of new things is always bumpy. While China's young warrant market has made great achievements, it is hot and irrational.
1、 The fierceness of the market leads to the lack of rationality and the serious imbalance between supply and demand in the warrant market
1. High turnover rate in warrant market
The popularity of the warrant market is reflected in the active transaction and high liquidity. There were only 27 warrants listed and traded at the same time in Shanghai and Shenzhen, but the daily trading volume of more than 20 warrants was greater than the trading volume of more than 2000 warrants in the Hong Kong warrant market. For example, on June 26, 2007, the total turnover of 17 warrants in the warrant market reached 137.009 billion yuan, with an average turnover of 8.071 billion yuan per warrant. On the same day, the total turnover of nearly 1500 stocks in Shanghai and Shenzhen Stock Exchanges was only 188.761 billion yuan, accounting for 72.69% of the turnover in the warrant market; On the same day, the total turnover of thousands of warrants in the Hong Kong market was just over HK $18 billion.
2. Half seawater, half flame
(1) There is a great deviation in the pricing of China's warrant market.
Some warrants can continuously maintain a negative premium of more than 10%, and the maximum negative premium is even as high as 20%; However, the put warrants with extremely false value are seriously overestimated as a whole. The put warrants with a value close to zero are equivalent to waste paper, but can maintain a trading price of 3-4 yuan for a long time. This overestimation phenomenon will not return to zero at a faster speed until the expiration of the warrants is near.
(2) The warrant market is extremely hyped.
In the warrant market, rational investment has given way to madness. On May 30, 2007, the market fell significantly. The five put warrants of CMB CMP1, Potash JTP1, CIMC ZYP1, Wuliang YGP1 and Valin JTP1 took advantage of the momentum and rose sharply. From May 30 to June 15, the five warrants rose 8.78 times, 6.40 times, 6.61 times, 4.66 times and 4.88 times in just 13 trading days. And there was a rare phenomenon that the warrant price was higher than the exercise price. The exercise price of Valin JTP1 (038003) was 4.769 yuan, while the highest price reached 6.315 yuan. The exercise price of Wuliang YGP1 (038004) was 7.89 yuan, and the highest price reached 9.334 yuan. That is to say, even if the stock price of the shares fell to 0, investors holding Valin and Wuliang put warrants would suffer losses, This is enough to make people dumbfounded.
3. Serious consequences caused by the lack of rationality in the warrant market
Behind the popularity and irrationality of the warrant market is the lesson of investors' losses. Statistics show that from May 30 to June 15, the four put warrants in Shenzhen market rose 4-6 times, respectively. However, among the 969400 accounts involved in the four put warrant transactions, the proportion of losses reached 36%, the amount of losses reached 2.075 billion yuan, and the average loss of each account was nearly 6000 yuan, The account with the largest loss lost 8.4 million yuan. What is more tragic is that in the subsequent decline, investors suffered losses in a large area. Except that Potash JTP1 expired on June 22, the three warrants of CIMC ZYP1, Wuliang YGP1 and Valin JTP1 fell by 62.09% on average from June 18 to July 20. During this period, 932100 accounts involved in transactions suffered losses of more than 70%, amounting to 7.271 billion yuan, with an average loss of 11100 yuan per account, The account with the largest loss lost 12.46 million yuan.
4. Reasons for the popularity and irrationality of warrant market
If we want to formulate measures to deal with the irrationality of the warrant market, we should explore the causes of this hot and irrational formation.
(1) Demonstration effect of wealth
The development history of warrant markets in Hong Kong, Taiwan and other places has confirmed that warrants can get great development and prosperity in the bull market, because the high leverage of warrants can make wealth grow rapidly. Warrants in the mainland market also fully reflect this function. For example, Wuliang warrant YGC1 has increased 48 times since its listing, while Wuliangye The stock has only risen 552% since its warrant was listed. Another example is the Capital Warrant, which rose 11.88 times during its existence, while Capital stock During this period, it rose only 146%. Such a huge wealth leverage effect makes warrants popular among many investors.
(2) Investors' cognitive limitations on warrants and blind follower behavior
There are two kinds of warrants: call and put, which represent the long and short trading directions respectively. If you are optimistic about the rise of stocks, you should buy the call warrants. If you are optimistic about stocks and think they will fall, you can buy the put warrants. However, many small and medium-sized investors in China do not have a special understanding of the basic types and characteristics of warrants. They ignore the intrinsic value of warrants, are keen on gossip, and listen to market rumors in a biased manner. Under the advocacy and deception of some people with ulterior motives, they have a mentality of becoming rich, and under the control of lucky psychology such as "I can escape", "I will not receive the last shot", Leaving important indicators such as warrant type, exercise price, expiration date, and exercise proportion behind, we blindly follow the trend and fight in and out of the warrant market, chasing up and down, which has caused the current domestic warrant market to rise and fall sharply, and has also created a spectacle of put warrants that look like waste paper. They rise when stocks fall and rise when stocks rise.
(3) Limited warrant market capacity, unable to meet the diversified demand for funds
According to the habit and tradition of speculation in the market, funds have a demand for innovative products; According to the investment habits of small and medium-sized investors, funds have a demand for financial products with absolute low prices; According to the investment behavior of investors keen on short-term trading, funds have a demand for T+0 trading; According to investors' concern about the historical high level of the market, funds have a demand for short selling mechanism. Warrants are just able to meet these needs of investors, so they attract a large number of funds swarming in. However, since the listing of the first warrant, the total number of initial issuance of all 40 warrants has been only 20.3 billion. Based on the data on October 31, the number of initial issuance of 16 warrants in circulation is only 6.9 billion, which is only equivalent to the circulation of a large cap stock. The capacity is quite limited. (In the same period, Hong Kong, based on the data on October 31, has 159.2 billion warrants in circulation, far more than the mainland market.) It can be seen that the supply and demand of warrant market is seriously unbalanced.
All these market conditions, on the one hand, indicate that there are irrational factors in the market, which is easy to cause investors to follow blindly. On the other hand, the quality of our investors needs to be improved. More importantly, the internal nature of the market itself strongly calls for the management to alleviate this pressure and the contradiction between supply and demand through market adjustment.
2、 The creation of mechanisms has greatly alleviated the imbalance between supply and demand
1. The creation system ingeniously imposes supply without affecting the value of the warrant product itself.
Some people believe that the creation system itself affects the pricing of warrants. In fact, it is not. The created warrants and non created warrants of the same subject matter have the same terms and rights, and have no impact on the intrinsic value of the non created warrants upon expiration, let alone diluting or diluting the rights of non created warrant holders. Therefore, creation is an effective institutional arrangement to increase supply without affecting the intrinsic value of warrants.
2. Effectively curbed excessive speculation in warrants and reduced losses of more investors
The creation of mechanisms has played an important role in stabilizing the irrational volatility of warrant prices by increasing market supply. The empirical results show that the creation mechanism can expand the supply and effectively reduce the fierce volatility of corresponding warrants.
In addition, the creation mechanism also effectively curbs the possibility of speculation of warrants and protects the interests of most investors. For more than one year after the listing of CMB CMP1, the trend was stable and the warrant price was relatively rational. However, in early June 2007, the market made a sharp adjustment at a relatively high level. Some large investors used this time to make irrational speculation, rapidly raising the CMB CMP1 price outside the deep price, making the warrant price seriously out of its reasonable value range, It has seriously disrupted the order of warrant trading. If the situation is not reversed in a timely manner, small and medium-sized investors with relatively poor warrant knowledge may blindly follow suit, and it will be small and medium-sized investors who will ultimately pay for the market. The creation mechanism played an important role at this juncture, providing a total of 3.985 billion warrant shares for the market, effectively preventing the CMB CMP1 price from being pushed up again.
3、 The establishment of the system has protected the interests of most small and medium-sized investors to the greatest extent
1. Effectively reduced the range and extent of investors' losses
The main force of warrant investment comes from individual investors. The statistics of the Exchange also show that the transaction amount of warrants created by institutions only accounts for 0.1% of the total transaction amount of warrants. There is a great probability that the warrants out of the deep price will return to zero when they expire. Investors' participation in speculation is essentially a zero sum game. Due to the existence of transaction costs, even negative sum games, that is, "the more up, the more down". The gains of a few people are based on the losses of many people. The excessive deviation of the warrant price from its true value is quite risky for investors, especially those small and medium-sized investors who follow the trend. Through the creation of warrants, the time and space for warrants to deviate from their theoretical value are effectively restrained, and the process of wealth return to zero is more orderly and stable. Although it has caused dissatisfaction among a few large investors who are trying to gain huge profits by manipulating warrants, from the overall perspective, the creation essentially protects the interests of most small and medium-sized investors.
2. Basic Functions of Promoting Warrant Regression Value Discovery
Through the creation of warrants, the market price of warrants has been promoted to approach its theoretical value, which is conducive to improving the pricing efficiency of warrants. The success rate of investors investing in warrants through market information has been greatly improved, and the short mechanism and leverage of put warrants can also be effectively played, which plays an important role in realizing rational market investment and value investment. Under normal circumstances, the prices of the call warrants and the positive shares change in the same direction, and the correlation coefficient is positive. The prices of the put warrants and the positive shares change in the opposite direction, and the correlation coefficient is negative. Through empirical research, we find that for call warrants, no matter whether there is a creation mechanism, the positive shares and warrants maintain a high correlation, and the creation mechanism plays a more obvious role in the put warrants, which further enhances the negative correlation between warrants and positive shares.
3. The creation of warrants is an effective means to reveal risks
The warrant creation mechanism is an effective means to reveal risks to small and medium-sized investors. Investors can roughly judge the risk contained in the warrant price by paying attention to the frequency of the founder's creation announcement. If the warrant is at a certain price level, the more founders, the larger the creation share, indicating that the price of the warrant has reached an extremely unreasonable area, and investors are not suitable to participate in the warrant from the perspective of stability and risk return ratio.
4. Improve the quality and investment level of investors
Due to the existence of the warrant creation mechanism, the regulatory authorities and the founders are actively engaged in the investor education and risk disclosure of warrants, revealing the tricks of using the characteristics of warrants in the market to deceive small and medium-sized investors, and answering the puzzles and problems of a large number of investors in the process of investing in warrants, Fundamentally improved the quality and self-protection awareness of the entire warrant investor team.
Therefore, the creation of a mechanism is a powerful measure to effectively protect the interests of most small and medium-sized investors.
4、 Reasonable and legal mechanism
1. The creation of the mechanism conforms to international practice
In mature foreign markets, there is a "continuous creation" mechanism, which allows the issuer or other institutions to issue additional warrants with the same terms when the warrants are overvalued or the market is too hot. Under the premise of not obtaining the consent of the listed company, the warrants issued before and after share the same security code for trading, as an obligation attached to the issuance of additional warrants, The issuer must try its best to maintain the stability of the warrant market and provide liquidity for the warrants. For example, the Hong Kong market allows the issuer to issue the same series of products again or more times after the issuance, which is basically consistent with the purpose and process of the current domestic warrant creation.
2. The creation of mechanism is reasonable
In terms of relevant rules, the creation of mechanisms is reasonable. It is clearly pointed out in the instructions of relevant share trading reform that the creation of warrants was approved by the shareholders' meeting through voting, and it is announced that all investor warrants have certain creation risks in the secondary market.
The founder will issue a listing announcement before the listing of the creation warrants. While notifying market participants in advance, securities firms, as multiple identities such as warrant issuers, arbitrageurs, short sellers and market makers, resolve the imbalance between supply and demand by adjusting the circulation share of warrants, making the derivatives market return to rationality and curbing excessive speculation. The purpose of restraining excessive speculation is to prevent further speculation of warrants from infringing the rights and interests of more participants (because warrants will eventually return to their intrinsic value). From this point of view, the creation of mechanisms also conforms to the principle of "openness, fairness and fairness" in securities investment. The introduction of warrant creation mechanism is not only conducive to the development of financial innovation, but also has laid a solid foundation for China's securities market regulatory authority to transform its functions and do a good job as a referee.
3. There are laws to establish mechanisms
The warrant creation mechanism also has laws to abide by in law. According to Article 118 of the Securities Law, the Exchange may formulate listing rules, trading rules, membership management and other relevant rules for securities in accordance with securities laws and administrative regulations, and submit them to the securities regulatory authority under the State Council for approval. According to this law and regulation and the actual situation of China's securities market, Shanghai Stock Exchange formulated the Interim Measures for the Administration of Warrants, which was finally approved by the CSRC. In accordance with the legal Interim Measures for the Administration of Warrants, the Shanghai Stock Exchange has formulated relevant regulations on the creation of warrants.
In order to control risks and effectively protect the interests of investors, Shanghai Stock Exchange has formulated very strict measures for warrant creation guarantee. The creation of call warrants requires full mortgage of the positive shares required for exercise, while the creation of put warrants requires full mortgage of the funds required for exercise, so as to ensure that investors can exercise their rights when they are due, while the creation of warrants by securities firms has priority for exercise. In addition, the warrant creator also bears some other important obligations, such as investor education, risk disclosure, etc.
At present, the warrant creation mechanism has been implemented for nearly two years, and all participants in the warrant creation have also operated in strict accordance with the requirements of the regulations, without any violation. In a word, the establishment of the mechanism is based on the experience of foreign mature markets, and considering the current domestic reality, a reasonable and legal market-oriented mechanism has played an important role in promoting the healthy development of China's warrant market.
5、 The creation and cancellation of warrants is a risky market-oriented behavior
1. The premise for the creation of warrants is that the price is seriously overestimated to an irrational degree
Under the 100% mortgage guarantee system, warrant creation is not a market neutral arbitrage operation, nor is it an effective way to make money. If the margin of safety is not large enough, and if there are errors in judgment and operation, securities companies may suffer significant losses. It is particularly important that in the bull market, the creation of warrants has an opportunity cost, that is, to give up the greater returns of the stock market and obtain only the relatively small returns of the overvalued warrants.
The creation requires the creator to pledge 100% of cash or stock. If the price of the warrant does not seriously deviate from its theoretical value, the creator cannot create. Because the warrant is generated based on the no arbitrage theory and the market neutral principle, if the warrant price is near its theoretical value, the creator can only adjust the mortgage or the cash or stock for risk hedging through the change of DELTA. If the number of mortgages exceeds the number calculated by DELTA, the creator has a considerable probability of loss. Therefore, the premise for the creation of warrants is that the price is seriously overestimated to an irrational degree.
2. The scale and enthusiasm of securities firms depends mainly on the degree of overvaluation of warrant prices
The purpose of its creation is to restrain the irrational overestimation of warrants and protect the interests of small and medium-sized investors. However, the creator is the economic entity responsible for its own profits and losses in the market. If the deviation of the warrant price does not reach the range of making up losses, the securities firm will not create the warrant. Under the 100% mortgage guarantee system, the warrant price must reach the level of serious distortion to trigger the creation. If the goal of returning the warrant price to rationality is achieved, the securities firm will cancel and recover the funds. If this goal is not achieved, the securities firm will continue to increase the efforts of creation. Therefore, the creation and cancellation decision of securities companies is completely based on the market performance of warrants.
3. The founders paid a huge opportunity cost in the bull market
Some investors believe that the securities companies have earned large profits in the creation of warrants, thus denying the rationality of the creation mechanism. However, ordinary investors do not have the opportunity to conduct careful statistics and data analysis, and therefore cannot objectively evaluate the profits and risks of the securities companies in the creation process.
Founders, whether they create call warrants or put warrants, in essence have to bear the risk of stock decline. If the market is significantly adjusted, the risk is great. Although the overestimation of warrants provides a certain margin of safety for the creator, which can make the creator not lose money or even gain a certain amount of income, the opportunity cost paid by the creator cannot be ignored.
The following table shows the creation and cancellation price of the warrant and the corresponding positive share price calculated by weighting (weighted by the creation scale according to the announced closing price on the creation and cancellation date):
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Data source: provide data calculation through wind
The data shows that the founder sold the warrant at a lower price and bought it back at a higher price for the creation of the warrant. Although most of the losses incurred can be made up by the rise of the positive shares, the average return rate is only 12.3%, and the average return rate of the positive shares in the same period is 64.5%. Especially in 580005, the founders suffered a large loss. For the creation of put warrants, since the selling price is lower than the buying price, the creator has a certain amount of income, but because the collateral is cash, the creator cannot share the income of the stock rise. To take the simplest example, since the listing of China Southern Airlines JTP1, in order to curb the irrational fluctuation of price, securities companies have actively created. Statistics calculation reveals that as of October 31, the weighted creation yield of securities companies was 40.3%, but since June 26, when securities companies can create, China Southern Airlines' stock has risen from more than 9 yuan to more than 20 yuan, with the highest price reaching 30.5 yuan. If the securities companies directly buy the regular shares of China Southern Airlines, the income they get can at least double, which is far greater than the creation, and the securities companies have lost a lot of opportunity costs.
It can be seen that the creation of warrants needs to bear market risks and pay opportunity costs. Due to the imbalance between supply and demand in the warrant market, some speculation funds are over hyped, and the lack of rationality distorts the true nature of the market. Exchanges and brokers must assume corresponding market responsibilities, suppress the irrational speculation of warrants, and protect the interests of small and medium-sized investors. From the actual market effect, the creation mechanism has really played an important role. However, in the long run, it is impossible to adapt to and meet the demand of investors for new varieties and solve the imbalance between supply and demand in the warrant market only by creating securities companies, which requires further expansion of the warrant market.
(Author: Zhong Xin, Donghai)
