Judge Allows Susquehanna to Force Brokers to Identify Traders in $70 Million Insider Case

The traders bought put options on shares of Chinese brokerage platforms right before Beijing announced a crackdown. Susquehanna argued that the timing had "only one plausible explanation": insider trading.

A Perfectly Timed Bet

Susquehanna says that during the period just before the announcement, unidentified traders bought roughly 200,000 short-dated put option contracts on stocks like Futu Holdings and Up Fintech. They spent about $12 million on those options.

The bet was placed on a drop in the share prices of those companies. For example, one Futu put option cost $1.50 per share when Futu's stock was trading at $124.58. The strike price - the price at which the option can be exercised - was $102.45.

Then on May 22, the Chinese government announced actions against cross-border securities firms. That announcement sent Futu's stock crashing to $81.08. The profit per share on that single put option was $19.87.

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Put options become more valuable when the underlying stock falls, so the traders' massive bet paid off spectacularly. Susquehanna, as the seller of those put options, was on the opposite side of the trade and suffered the corresponding loss. The firm claims it was the seller of those put options, meaning it lost more than $70 million when the stocks fell. The total profit Susquehanna estimates the alleged insider traders made is more than $100 million.

The Court Order and What Comes Next

Susquehanna went to court because it could not identify the traders on its own. In its filing, the firm stated that there was "no reasonable alternative means" for it to obtain the identity of each defendant.

An Interactive Brokers spokesperson said, "it had been cooperating with Susquehanna, including freezing accounts, since the trading activity was identified." Futu and Up Fintech did not respond to requests for comment. The Chinese government penalty that triggered the stock drop was massive.

China fined Futu 1.85 billion yuan (about $273 million). Futu's founder Leaf Li saw his personal fortune plunge by $1.7 billion in a single day.

Susquehanna is a giant in the trading world. The firm reported more than $893 billion in total equity positions in an SEC filing. Its co-founder Jeff Yass has an estimated fortune of $92 billion, according to the Bloomberg Billionaires Index.

Worth Noting

The order does not guarantee that Susquehanna will recover its losses, but it opens the door to potentially pursuing the alleged traders for damages. The case hinges on whether the court will accept that the trade timing proves inside information was used.

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