4 Tips: Stock Volatility, Derivatives Root of Many Market Issues
In response to the recent fluctuations in the A-share market and issues related to financial derivatives, four major recommendations are proposed to the authorities: 1.
The current financial derivatives in A-shares are more conducive to short selling in the stock market: The stock index options and ETF options are traded once a month, leading to a habitual short selling as the market approaches the option expiration, especially noticeable since April this year.
Looking back over the past three years, 90% of the time A-shares are shorted when approaching option expiration, which is no longer a coincidence.
A-shares experience a sell-off near the option expiration in April, May, June, July, and August each month—Analysis: The current bi-monthly option expirations in A-shares have made it almost impossible for A-shares to have a complete month of single-month gains in recent years.
Whenever the market has a bullish sentiment, it is shorted once it encounters an option expiration, leading to an increasing short-term volatility in A-shares, which is completely contrary to the original intention of "using options to reduce A-share volatility.
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"—Recommendation: Change the A-share options to expire once a quarter, as is the international norm, to avoid the short-term fluctuations in the index caused by monthly expirations.
2.
The current system in A-shares is more conducive to short selling, such as the mismatch between individual stocks' T+1 and the T+0 of stock index futures and options, which makes the market more conducive to short selling rather than long buying!—Analysis: Since more than 90% of A-share traders are retail investors, and 90% of them do not have short selling qualifications, this leads to retail investors being able to profit only by long buying stocks, and panic selling is more likely to occur when the market falls.
Therefore, the direction of financial derivative benefits is more likely to take advantage of the panic selling effect of retail investors to repeatedly profit from short selling.—Recommendation: Introduce "short ETF" products, such as the CSI 300 double short ETF, etc., so that retail investors have hedging options, which will slow down panic selling!
When both institutions and retail investors have rules for profiting from short selling, it will greatly increase the difficulty of institutions making profits from short selling.
3.
There is a high degree of correlation between Northbound capital and heavyweight tool stocks and ETF options, stock index options, which is suspected of forming a certain degree of manipulation.—Analysis: Through observation, most of the time, Northbound capital is a net seller when approaching option expiration, and then by selling super heavyweights such as Ping An, China Merchants Bank, Ningde Times, Moutai, SMIC, etc., it guides the corresponding adjustments of the Shanghai-Hong Kong Stock Connect 50 ETF, CSI 300 ETF, ChiNext ETF, STAR 50 ETF, and then profits through financial derivatives.
Currently, the weights of Guizhou Moutai, Ningde Times, China Merchants Bank, Ping An, SMIC, and other varieties in various ETF options are too high.
Northbound capital has focused on holding such super heavyweights for many years, and by affecting the trend of super heavyweight individual stocks, it is suspected of manipulating the trend of ETFs, and then it can profit through related financial derivatives.
This is also the core factor why the A-share market always experiences a sell-off when approaching option expiration each month.—Recommendation: Reduce the weight ratio of super heavyweights such as Moutai, China Merchants Bank, Ping An, Ningde Times, etc.
in ETFs, and add central enterprise varieties such as China Mobile, PetroChina, and the four major banks to limit the control factors of Northbound capital.
4.
Short selling issue: Although A-shares have introduced financing and short selling for a long time, the source of short selling is scarce, basically controlled by institutions, especially quantitative institutions, and has almost formed a monopolistic short selling model in the market.—It has been reported in the market: Some quantitative institutions are good at hitting the board on a single day, and then borrowing "short selling" from securities firms, which has allowed quantitative institutions to achieve T+0 on the existing T+1 trading system.
This is a dimensional reduction strike on the existing trading environment.
If this continues for a long time, it will not only increase the short-term speculation of A-shares, but also make most non-quantitative short-term investors become repeatedly harvested leeks.—It is recommended: Either improve or interrupt the quantitative short selling model, or study to open the T+0 system, so that the market is in a fair and transparent trading environment.
Even if many retail investors like to do short-term trading, they will gradually return to medium and long-term investment after being educated by the T+0 market.
And quantitative institutions will also find it difficult to exploit various loopholes in the T+0 market.
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