Why Shares of Futu and UP Fintech Holding Are Getting Crushed Today

What happened

Shares of the online Chinese brokerages Futu Holdings (FUTU 4.75%) and UP Fintech Holding (TIGR 6.88%) are getting crushed today after the China Securities Regulatory Commission (CSRC) asked both companies to stop accepting new Chinese customers.

As of 10:49 a.m. ET, shares of both Futu and UP Fintech had each fallen about 25%.

So what

In a statement today, the CSRC said both Futu and UP Fintech had operated trading businesses without the agency signing off. While Futu and UP Fintech serve numerous clients in Mainland China, they don't have brokerage licenses in the country.

In 2021, China's Central Bank publicly said that online brokerages serving clients in China through the internet would still be operating illegally if they didn't have a license from Chinese regulators. This was really in reference to Futu and UP Fintech.

In response to the CSRC, Futu issued a statement today, saying that the company "will fully cooperate with the CSRC and take all necessary measures to review its cross-border operations in mainland China and to comply with all applicable rules and regulations."

Futu added, "In the meantime, the company will continue to provide high-quality services to existing clients in China and further strengthen and expand its international operations."

UP Fintech said it's been following "relevant laws and regulations in its daily operations," and that the company would abstain from taking on new Chinese customers and would cooperate with regulators. 

Now what

The news from the CSRC certainly caught investors by surprise this morning, but it's actually quite common for Chinese regulators to impose such swift, restrictive measures on companies if they don't like the way they are conducting their businesses.

It's one of the reasons investors looking at Chinese stocks need to be acutely aware of the regulatory environment in the country and how specific stocks may be impacted.

Until there is more clarity that Futu and UP Fintech are in better standing with regulators, I would avoid both of these stocks.