What happened

Shares of two Chinese online brokerages traded down this morning after investors learned that the two companies could face substantial regulatory risk from a new law. Shares of Up Fintech Holding (TIGR 0.51%) traded down roughly 21%, while shares of Futu Holdings (FUTU 0.34%) traded down nearly 14%, as of 11:55 a.m. EDT.

So what

Reuters reported that The People's Daily, the official news organization of the leadership of the Chinese Communist Party, said that the two brokerages, which enable Chinese citizens to invest in foreign stock markets such as those in the U.S., could face a regulatory crackdown from a new law about to go into effect in China on Nov. 1.

The Personal Information Protection Law will impose stricter regulations on how consumer data is sent outside the country. This, according to The People's Daily, could be problematic for Futu and Up Fintech, because these two companies do not have Chinese brokerage licenses.

Rather, Chinese citizens are able to open accounts with Futu and Up Fintech after they provide personal financial and identification information online.

Red line with arrow moving downward.

Image source: Getty Images.

Now what

It doesn't seem like anyone knows exactly if this will prevent Up Fintech or Futu from providing their online brokerage services, but the news follows a common theme regarding Chinese stocks that trade on U.S. exchanges: regulatory risk.

While these Chinese stocks present tremendous growth opportunities due to the explosive markets in which they operate, they also face unpredictable regulatory risks from the Chinese government, which has impacted many sectors in the country from cryptocurrencies to real estate. Unless you really understand how Chinese regulators operate, I suggest extreme caution on any of these stocks.