New covered warrant issuing rules requiring a minimum free float of shares were designed to protect investors. They look to be having the opposite effect. Phenomenal demand for leveraged red chip exposure is pushing basket warrant prices, comprising stocks banned under the regulations, to giddy levels. Since estimating basket warrants' true value is tricky few investors are aware of the danger. With a minimum free float of $4 billion required over 90 days, new issues on China Everbright and China Merchants International are banned. The trouble with suppressing demand is that it quickly shows up elsewhere. In this case existing red chip basket warrants, including both stocks, are now trading at up to three times their fair value. Unlike individual stock warrants - where implied volatility gives an easy benchmark of value - estimating the true worth of a basket product is impossible for all but derivative professionals. Inevitably, as they reach maturity, prices will crash, leaving investors badly burned. Had the demand been satiated through new warrant issues such mis-pricing might well have been avoided. The rules were designed to protect investors by the cornering of stocks with a small float to protect investors. Ironically they seem to have created a beast taking on a life all its own.