The Shanghai Stock Exchange has issued a warning to investors aimed at cooling rampant speculation in the mainland's nascent warrant market and singled out Baoshan Iron & Steel warrants as particularly risky. The warning, entitled 'Notice on strengthening risk management in the warrant brokerage business', was circulated among brokers last Friday but has had little effect on warrant prices so far. The circular asked all brokers to improve oversight of trading account activity and require investors to sign an acknowledgment of risk statement. 'Warrants have appreciated out of synch with the price of the underlying stock and there is definitely a bubble in the market due to speculation,' Guotai Junan analyst Wu Jianxiong said. The outstanding warrant on Baosteel stock gives bearers the right to buy the shares for 4.2 yuan each and expires on August 30. Baosteel shares closed yesterday at 4.33 yuan but the warrant closed at 1.386 yuan. 'At current levels, investors are expecting Baosteel's stock to be at least 5.60 yuan in two months' time, which even the most optimistic of people would say is unlikely,' Privatizing China co-author Fraser Howie said. Warrants were introduced last year as part of the continuing state share reform process, with holders of state-owned shares using them as a way to compensate minority holders of tradable shares. They were the first financial derivatives product permitted in the mainland since such instruments were banned amid massive trading scandals in the mid-1990s. Besides their novelty value, investors have been drawn to the fact that they are not subject to trading restrictions that apply to regular stocks, such as a ban on intraday trading and a 10 per cent cap on daily price movements. 'Because this is the only product you can trade very freely with no restrictions on its price movements, we have seen huge volatility and volatility attracts a lot of investors because you get people who can treble their money in a day,' Mr Howie said. At one point late last year, there was more volume being traded in the seven available warrants than in the entire listed stock market, an indication of huge speculative capital flows. The Baosteel warrant has fallen significantly from 2.20 yuan two weeks ago and most of the other dozen or so warrants have experienced similar volatility.