Market watchers and warrant issuers urged investors to be cautious in buying derivatives warrants.

A warrant investor said that if the terms of different warrants are similar, he would definitely pick those with more transactions. He believes this to be a very important factor before choosing a warrant.

"It's like choosing a restaurant. I will pick restaurant with more customers as it can mean the restaurant is better," he said.

Ricky Tam, chairman of Hong Kong Institute of Investors agrees that many retail investors choose warrants based on turnover as it means more people are speculating. Meanwhile, they can sell the warrants in hand more easily if there is high liquidity.

"Hence, the turnover can be misleading if there is fraudulent transactions," said Tam. "Issuers can benefit from this by attracting more warrants buyers."

Tam also urged investors to see the outstanding quantity besides the total turnover. If the turnover is much bigger than the outstanding quantity, it might mean that the trading is much concentrated on the transactions of several dealers.

The derivatives warrant market opened yesterday as normal despite the arrests. The turnover of Hong Kong stock market was HK$64.33 billion.

However, warrant transactions dropped to HK$11.23 billion from yesterday's HK$14.26 billion, accounting for 17.52 percent of the total market turnover. It is the lowest in nine months except for the day of market plunge last August.

The trading volume of the warrant market usually accounts for some 20 to 30 percent of the Hong Kong stock exchange's daily turnover.

However, share prices in the Hong Kong Stock Exchange dropped as much as 4.26 percent from Wednesday's closing price at HK$136.20 before closing at HK$134, down 1.62 percent.

"I believe the incident would not have significant impact on Hong Kong's warrant market in the long term," said Raymond So, associate professor of department of finance at the Chinese University of Hong Kong.

"However, it may affect investors' confidence and may shrink turnover in the short term," he added. He believed there are rooms for regulatory improvement but it is difficult to fully prevent market frauds.

"Warrant is a highly risky investment product, so investors should see every single detail of the warrants including implied volatility, maturity and gearing," said So.

Johnny Yu, director of equity risk management products at UBS, said the illegal transaction case announced by ICAC did not have strong impact on the stock market yesterday. The lower turnover was likely to be the result of the options clearing and settlement and the weak market sentiments.

(HK Edition 05/30/2008 page3)