Monday, May 30, 2011

A New Minefield: Halted Stocks in Limbo

I've written quite a bit recently about the very treacherous Chinese equity markets, even (or especially) in the shares on Chinese companies listed on U.S. exchanges. I now believe that China has a fundamentally flawed economic and political system, especially because it prevents people from thinking and acting on the basis of sound information.

Here is an amazing article about China Fire Security, a suspicious-seeming Chinese company. Based on what John Hempton writes, this would seem like a slam-dunk short.

Unfortunately, shorting these U.S.-listed Chinese companies seems to be a minefield, because when problems are discovered, the exchanges halt trading in the shares. And when shares are halted, options trading is halted too. But, not options exercise! At expiration, the long option holder has to decide whether or not to exercise and go long or short, even though they don't know the market price of the underlying! There are currently about a dozen companies where this is a problem [pdf] due to halted shares.

The question: why do U.S.-listed Chinese company shares get halted indefinitely when irregularities are discovered? Whose interests does that serve?

What do you want to bet that the longs pretend that the shares are worth the last traded price before the trading halt, even though the real value is slim or none?

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