The Hubei carbon exchange is threatening to cancel the licenses of trading firms making outlier bids or offers in a bid to root out market manipulation, sparking complaints of government intervention.

The exchange on Thursday evening warned market participants against making bids or offers that deviate significantly from current price levels.

“Effective immediately, we will restrict bids far higher than asking prices and offers far lower than bidding prices,” it said in a statement.

The announcement came a week ahead of the deadline for ETS participants to surrender allowances to cover their 2014 emissions.

Some of Hubei biggest cement factories are short by over 1 million permits, and according to one source recently had a request to the provincial government to borrow permits from next year’s allocation denied.

With those firms now likely forced to dip into the market and buy the allowances they need over the next week, regulators are worried about price manipulation, even though the Hubei carbon price has been very stable around the 25 yuan ($4) level.

But on Friday the price plunged 9% to 23.19 yuan, with 227,000 allowances trading.

One trader said the exchange’s move unfairly targeted traders looking to take advantage of arbitrage opportunities.

A sizeable OTC market has developed in Hubei, which suits speculative traders as daily price movement restrictions are less stringent than on the exchange. Some speculative traders have been buying parcels of 10,000 allowances or more OTC and then selling them back in smaller clips on the exchange at higher prices.

Traders also take advantage of the offset market, by selling CCERs at 7.50-15.50 yuan to compliance buyers in exchange for permits at well below market prices.

“It is clear that the government is interfering in the market in order to squeeze out arbitrage traders,” one trader who wished to remain anonymous said.

By Stian Reklev – stian@carbon-pulse.com