China clamps down on algorithmic trading

September 8, 2015 2:58 PM (UTC+8)

 

Chinese regulators don’t want some people to do the math …

Continuing the process of adding stability to the mainland’s stock markets after a tumultuous summer, Chinese authorities have begun clamping down on algorithmic trading. And unlike the time when the authorities went after “malicious short sellers,” this time the manipulators may actually exist.

Algorithmic trading, sometimes called high frequency trading, is when traders use automated computer programs to place multiple buy and sell orders milliseconds apart.

The Shanghai and Shenzhen stock exchanges on Aug. 3 announced they had identified and punished at least 42 trading accounts suspected of using algorithmic trading to distort the market, reported Chinese news agency Caixin.  Twenty-eight were ordered to suspend trading for three months, including accounts owned by the US hedge fund Citadel Securities, a Beijing hedge fund called YRD Investment and Ningbo Lingjun Investment.

Then, the China Financial Futures Exchange announced on Aug. 26 that 164 investors would be suspended from trading over high daily trading frequency, reported Caixin. The suspension came after the China Securities Regulatory Commission (CSRC) said the practices of algorithmic traders tend to amplify market fluctuations.

Specifically, the CSRC’s investigation is focused on spoofing, an unnamed source told Caixin. Spoofing is a practice where traders cancel buy and sell orders before they are fulfilled in order to move stock prices.

Hedge-fund managers told Caixin algorithmic trading does not necessarily involve malicious intentions because the high frequency of order cancellations may be the result of a computer program flaw that comes into play under extreme market volatility. Of course, not necessarily doesn’t mean never.

Algorithmic trading is a controversial topic globally. In the US, the stock market’s recent flash crashes have been blamed on high frequency trading, with many accusations of spoofing. Apart from real market volatility and potential manipulation, algorithmic trading is unfair because the huge investment in technology squeezes out individual investors. Supporters say it improves liquidity without breaking regulations.

Unfortunately, there is no universal definition for algorithmic trading. The New York Stock Exchange categorizes it as any order to buy or sell 15 or more stocks at one time. Caixin’s source said futures exchanges consider an account repeatedly placing five orders or more every second as algorithmic trading.

A private equity manager in Beijing told Caixin that more than 1,000 Chinese investment institutions use algorithmic trading. Ding Peng, director of the Chinese Society of Quantitative Investment, a non-governmental investment research body, said the total value of algorithmic trading-related investment products has reached 100 billion yuan.

After its trading accounts were suspended by the exchange, Beijing YRD and Ningbo Lingjun published statements saying that repeated cancelled orders by their accounts was done automatically by a computer system on July 8 when the exchanges halted trading of related stocks after a slump exceeding the daily limit, reported Caixin. The companies said they did not intentionally manipulate orders.  They also said they are preparing materials to explain the matter to the CSRC and to have the accounts reopened.

As of now, China has few rules governing algorithmic trading, just guidelines from the Shanghai Futures Exchange and China Financial Futures Exchange. However, the CSRC is taking steps to draft some rules.

In another move to increase market stability, late Monday, the Shanghai and Shenzhen stock exchanges instituted circuit breakers to halt trading when the CSI 300 Index moves certain percentages. The CSI 300 tracks the 300 largest companies listed in Shanghai and Shenzhen.

Comments