Government Intervention in Security Markets: Evidence of Contagion, Speculation, and Informed Trading

The Chinese government’s interventions into the futures market for steel during 2016 provide a natural experiment to study the unintended consequences of interventions. Although hot rolled coil (HRC) and rebar are products with nearly identical components, their futures contracts trade separately. China intervened into the futures market for rebar but refrained from doing so for HRC. We document impacts of interventions measured by increased volatility, trading volume, and spreads in both markets. There is also evidence of informed trading in both markets, reflected by abnormally high trading volumes and low open interests occurring the day before the announcement of interventions.