China Evergrande (HKG: 3333) (OTC: EGRNF) stock is up 24,900% yesterday. Or, if we look at another listing and quotation, Evergrande is up perhaps 5%. Sure, there’s a time mismatch there but that really is a very different performance. So, what’s going on here? Shouldn’t both instruments trade in lockstep with each other?
And yes, the two instruments should trade in parallel. But the way they do is that people buy one and sell the other when prices move out of line. That is, it’s the arbitrage between the two prices that keeps then running together. If it’s not possible to do the arbitrage then the prices can - probably will - diverge. This is what is happening here. Evergrande (HKG: 3333), the Hong Kong stock, is liquid. You can buy and sell in pretty much any likely quantity at or about the ticker price. The OTC stock in the US, Evergrande (OTC: EFRNF) this is not so true of. In fact, even modest buying will bounce that price into the stratosphere, Which is exactly what is happening here.
The HK quote:
China Evergrande HK stock from Google Finance
The US OTC quote:
China Evergrande OTC stock from Google Finance
And the reason why?
China Evergrande OTC trades from OTC Markets
That trade is 130,000 pieces perhaps of an 8 to 10 cent stock. $7,000 worth (seven thousand) of trade? That’s really not liquid. It’s also true that the OTC stock isn’t even, really, a quotation, it’s a matched bargain basis. You can’t drive through a decent sized deal at anything like market prices. This is the very reason why the arbitrage isn’t, really, possible and also why the prices diverge so much.
There’s one extra level of complication here. Which is that the HK quote is in HKD, the US OTC quote in USD. So, actually, prices are pretty close to each other now. It’s in the past when the prices diverged mightily. We’ve talked about this with China Evergrande before, And EGRNF.
EGRNF jumped 24,900% because it became less illiquid and so moved closer to the HK price.