Low volume era: How funds make use of low liquidity

When SSE drops from 5500 to 3100 points, in order to avoid the blue chip 'mines', institutions increased their holdings in the lower cost stocks.

Long low volume trading period is making funds with big holdings in those lower costs stocks embarrassing.

The drying up of liquidity are limiting the flexibility of the funds.

One fund manager who had too much holdings in a certain non cyclical stock which is only having normal performance during the recent drop of the SSE, found the danger of low liquidity - for 10 trades he is able to suppress the stock price down by 50 cents.

Recently after private equities finished increasing their stock holdings, liquidity is even lower. Another fund manager says that unloading by funds at such low liquidity will only suppress stock prices even further. Those who bought are actually taking over the load. The only thing to do is to wait for the market to show signs of recovery.

Those lower costs stocks that were bought by funds are facing great risks. The net value is only the book value. When the funds that hold those stocks cannot withstand the selling pressure and unloads, it can easily cause the share price to drop easily reaching the lower permitted trading limit.

Private Equities Guerrilla Warfare

While funds are having embarrassing moments, it creates opportunities for the private equities.

SSE after going through the steep decline during the Olympic period, a lot of low costs stocks are not having much trading volumes at the low index level and is far from the high price where a lot of people are caught. It needs only 'little' amount of funds and it can easily create a serious of stock price rising to the upper allowed trading limit. That was said by a private equity manager. He is able to use just only 100 million RMB to send a lower cost stock up under collective bidding to the allowed upper trading limit.

The private fund manager says that you only have to avoid those stocks heavily loaded by funds and the the risks will not be too big. The problem is that at such low trading volumes, it is very difficult to collect enough 'chips'. So the trick is to keep the price at the upper allowed trading limit after the first pull up and then repeat the process a few times.

Actually, quite a number of private funds are using similar tactics. 宁波韵升, 鲁银投资, 宝光股份, 京新药业 are a few that show traces of such trading styles.

Another big private fund manager believes that at current declining market, private funds believing in value investment have suffered great losses. From what he knows, some of those private funds have carved out certain part of their funds to engage in the previously mentioned low risk guerrilla warfare trading method.