Non-collateralized Nature of Structured Products
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Warrants Guidebook
Monitoring price changes
Please click on each of the tiles below for more details
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Last traded prices
In order to track the price changes of listed securities, information sources such as the media, brokers and online providers will typically publish the “daily price change” for shares/warrants, comparing of the current traded price versus its closing price the day before.
However, with warrants, this method is often inaccurate as warrants do not trade as frequently as shares. Therefore the price that is listed as the warrant’s “previous close” may actually relate to a trade that happened the previous morning, two days earlier, or even weeks ago.
The above chart is an example drawn by using the last prices of a share and a corresponding call warrant. You will notice the circled portions of the chart show that the ‘recorded’ warrant price has remained unchanged despite movements in the underlying share price. This is because during those periods even though the warrant’s bid and offer prices have moved up and down with the underlying share price, the warrant did not record a trade, and thus continued displaying the same price under its “last traded price”.
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Bid prices
The most accurate way to calculate the price change for a warrant is to look at the change in bid prices over the period. The bid price shows the price at which you can sell your warrants and is therefore the best representation of its value at any point in time.
The example below shows the two different methods for calculating a warrant price change. In this case, the investor wants to know how the warrant price has changed since yesterday’s close and to compare this to the underlying share price change for the same period:
Unreliable way of calculating daily price change using last traded price:
The above shows the method that would be published by most publicly available information sources. In this case, it is totally inaccurate as the “last traded price” for the warrant that is used as the “closing price” actually occurred the previous morning. Therefore it is inaccurate to compare this to the share price change that recorded its last trade at market close.
Most accurate to look at bid prices over period of comparison:
The most accurate way to calculate the price change for a warrant is to look at the change in bid prices over the period. So in this example, the investor would look at where the bid price for the warrant was just before the market close the previous day, and to compare that with the current bid price. In this way, the period of comparison for the share and warrant are the same.
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Closing times
The Hong Kong Exchange re-implemented the Closing Auction Session (CAS) on 25 July 2016. With the introduction of the CAS, the securities market closing time has been extended to 10 mins at most with the random closing period between 4:08 to 4:10 pm. Given warrants are not covered under the CAS, the liquidity providers only quote prices till 4:00 pm.
The closing price of warrants is determined by the underlying prices at 4:00 pm rather than the official close at 4:10 pm in the CAS. This means the change of warrants may be differ from the closing price of the underlying. It is inappropriate for investors to compare the last price of the underlying in the CAS with the warrant close price directly as the period of comparison for the share and warrant are not the same. Normally the open bid and offer prices of warrant will take into account the underlying close price in the CAS of the previous day. To avoid buying or selling at prices higher or lower than the market, it would be wise for investors to trade after issuers’ quotes are in.
