China's regulatory crackdown in May left many investors scrambling, but some traders had foreseen the move. Just weeks before the announcement, an unidentified group significantly increased their positions in short-dated put options for both Futu Holdings and Tiger Brokers. As news broke on May 22, these traders reaped enormous profits from their foresight, transforming an initial investment of $12 million into more than $100 million—a staggering over 900% return.
#What actions are being taken against the traders?
Susquehanna International Group, recognized for its market making, responded aggressively to protect against what it claims are improper trades. On June 29, the firm filed a lawsuit in Manhattan, targeting up to 100 unnamed defendants. Susquehanna argues that these traders utilized material non-public information to time their bets against the affected fintech firms, which resulted in hefty losses for Susquehanna exceeding $70 million.
The court granted a temporary restraining order just a day after the lawsuit was filed. This allows Susquehanna to freeze any accounts related to these trades while they seek to uncover the identities of the involved traders. Reports indicate that many suspicious transactions were processed through Interactive Brokers and the brokerages in question.
#What prompted this significant trading activity?
The trading frenzy was triggered by China’s announcement about regulatory penalties for Futu and Tiger Brokers on May 22. The crackdown aimed to stop these firms from allowing mainland Chinese clients to invest in overseas securities without the required authorization. Following the announcement, shares of both companies fell sharply.
Susquehanna's lawsuit emphasizes that the trading behavior leading up to the regulatory announcement was striking enough to suggest insider trading. The nature of short-dated options generally makes them speculative instruments, but the volume and timing of these trades raise serious questions about their legality and intention.
#Why is this lawsuit noteworthy?
Notably, this legal action is a private civil lawsuit rather than an investigation led by the SEC, which sets it apart from typical market responses to suspicious trading activity. Susquehanna International Group is essentially conducting its investigation, seeking court orders to access trading records and reveal the identities of the anonymous traders. This self-initiated action reflects the growing tension in the trading environment and raises important questions on how insider information is handled in financial markets.