(Yicai Global) Aug. 9 -- Industry sources have denied an online rumor that China has opened an investigation into fund managers for insider trading using over-the-counter market options.

“The rumor said it involves over 300 fund managers, which is crazy,” a mutual fund expert told Yicai Global. A derivatives specialist also dismissed the hearsay, which went viral on social media yesterday, saying “these things are reported by netizens, and there is currently no evidence.” No asset management firm has publicly responded to the rumor yet.

It is both illegal and unethical for fund managers to deal in OTC options, an asset manager pointed out. Fund managers are not allowed to profit from buying or selling stocks based on undisclosed information, another said, adding that they are able to make money through options trading as these transactions will not show on public platforms.

The practice, which is easily concealed, can be tempting. A fund manager can buy call options before opening a position on a public platform, a source explained. If the stock price jumps 50 percent, OTC options based on the stock are likely to soar by more than six times.

“It's hidden and generates huge profits,” the person said.

It has happened before, but because the OTC market is not transparent enough, it was hard for the authorities to get to the bottom of it, according to the derivatives specialist. 

Four or five years ago, some fund managers were found to have been involved in insider trading using options, a quantitative trader said. But it is unclear whether that is still going on, he added, saying “it’s hard to trace OTC options behind lots of legal documents.”

Editor: Emmi Laine