How does further issuance affect the price of a warrant or CBBC?

Issuers are entitled to increase market supply of a particular warrant or CBBC where the outstanding quantity exceeds 50%, to prevent price fluctuations caused by short supply. The way this takes place is that the issuer applies to the Exchange for further issuance of the product.

“Outstanding quantity” means the quantity held by investors and is generally shown as a percentage. It is calculated by dividing the number of warrants or CBBCs held by the market on a particular day (after closing) by the total number of warrants or CBBCs issued. For example, if the number of certain warrants held after closing on a particular day is 10 million and the number of those warrants that had been issued is 100 million, then the outstanding quantity is 10%.

When the outstanding quantity is high, this means that the quantity held by the market is high, and the quantity held by the liquidity provider is relatively low. This makes it difficult to maintain steady liquidity. In other words, a product with a high outstanding quantity may be more vulnerable to the influence of the forces of market supply and demand. As a result, its price may not follow the price of the underlying asset very closely.

For this reason, further issuance has the potential to bring greater stability to the product price and minimise the chance of price fluctuations caused by the disequilibrium between supply and demand.