Background
In December 2014, the market surveillance team of the Exchange detected trading abnormality in the 1501 contract for a particular futures product. While the spot prices of the underlying commodity kept declining, multiple possibly related accounts continued to increase their holdings in this contract. At the end of December, this contract was locked at the lower price limit for three consecutive days. This extreme price movement wiped out the account balance of 86 clients, who suffered a loss of RMB 177 million yuan, and affected some futures firms. This incident received widespread attention.

Investigation
The China Securities Regulatory Commission (CSRC) launched an investigation in April 2015. It found that Jiang, the general manager of a domestic company, sought to corner the spot market to further strengthen the company’s dominant position and pricing power in the product. At the same time, using the 42 futures accounts under his control, Jiang increased the company’s stake in market-wide long position in the contract from 30.75% to as high as 76.04%. These actions triggered the abnormal price movements of the contract.

Sanctions
Jiang violated Article 71 of the Regulation on the Administration of Futures Trading (2012 version) for “manipulating futures trading prices individually or in collusion with others by buying and selling futures contracts jointly or successively through an advantage in capital, position holding, or information.” Consequently, the CSRC imposed the maximum fine of RMB 1 million yuan and lifetime market ban on Jiang.

The Lesson
This case warns investors that, first, investors are prohibited from influencing or manipulating market prices by engaging in wash trade or pre-arranged trade, unfairly taking an advantage in capital or position, or committing other violations. Second, in the commodity futures market, contract price is the result of many influencing factors (e.g., supply and demand) and moves according to its own set of rules. As such, investors should ensure all their activities are on a firm legal and compliant foundation and any attempt to corner the market will be punished not only by the market forces, but also by regulators. And third, investors should think rationally and with a cool head when seeing abnormal price movements. Following the crowd and acting purely on moment-by-moment market signals is likely to fall prey to criminals and incur losses.

This case has the Chinese version on the SHFE website. If there is any discrepancy between the English version and the Chinese version, the Chinese version shall prevail.