Market hard to call as performance fails to match Bocom debut amid probe by the SFC Expectations that the first 19 warrants to be traded on China Shenhua Energy would help to boost the mainland company's share price were dashed yesterday as the stock lost ground. Hopes had been raised by the 6.4 per cent surge in Bank of Communications' share price when its first nine warrants debuted on August 8 and by a belief that strong demand for the warrants would force the issuers to buy the underlying stock to hedge their exposure. 'These were all false expectations which didn't take into account that the market is totally different now,' said Venus Wong, an associate director of KBC Financial Products, one of the more active warrant issuers. Aside from the fact that the stock market was on a strong upward trend early last month, the banking sector was also more popular with investors, Ms Wong said. The new warrants on coal producer Shenhua saw a combined turnover of about $206 million, accounting for about 7.8 per cent of yesterday's trading in warrants and making it the second most active underlying security, according to market participants. But the performance was well below the 14 per cent of total trading that the Bocom warrants managed on their first day. Other market participants said speculation that Shenhua's shares would have a strong day because of the warrants debut could have sparked buying of the stock last week and resulted in profit taking yesterday. The shares finished 2.22 per cent - 20 cents - lower at $8.80 yesterday after edging up 15 cents last week. Meanwhile, there was little noticeable impact on yesterday's warrants activity following the Securities and Futures Commission's announcement last week that it had launched an investigation into 'suspicious' trading. Trading in warrants accounted for about $2.6 billion, or 19 per cent, of total market turnover, which fell to a 2?-month low of $13.7 billion. Tony Espina, chairman of the Hong Kong Stockbrokers Association, said the regulator should investigate possible manipulation in the warrants market but warned against any move to bring in new regulations. 'Hong Kong has a lot of small retail investors who cannot afford to trade the blue chips. They like to trade the warrants which are relatively cheaper and have a higher leverage ratio than trading the underlying stocks. Institutional investors also use warrants to hedge their portfolios,' Mr Espina said. He explained that there were two aspects of the warrants market which regulators should focus on - the reissue mechanism and the problem of issuers making the markets themselves. Mr Espina also called on the SFC to speed up the approval process for the stock exchange's planned introduction of callable bull and bear futures contracts which would be similar to warrants but whose terms would be favourable to small investors rather than to the issuers. As most warrants issued in Hong Kong are bullish instruments which allow investors to bet that the market will rise, a stagnant stock market typically results in a reduction in activity. Investors also tended to shift their focus from stock warrants to index warrants which was obvious yesterday as warrants based on the Hang Seng Index accounted for 45 per cent of the warrant turnover, Mr Lee said. 'Overall, the market has no clear direction at the moment which means warrants investors are subject to time decay. People should not invest a lot in warrants until the trend becomes clearer,' added Ms Wong.