CSRC looks to blacklist algo-traders

China’s securities regulator has moved to crack down on algorithmic trading in the second part of a two-pronged attack designed to prevent a repeat of this summer’s stock market plunge.

In a media briefing last Friday, the China Securities Regulatory Commission (CSRC) described it as an important move to stabilise its domestic securities market further.

However, in targeting algo-traders, the CSRC could be accused of seeking scapegoats among marginal players when the focus ought be on encouraging long-term institutional investment.

CSRC spokesman Zhang Xiaojun confirmed in the briefing that it had launched a consultation on proposed new rules for automated trading. If implemented, the changes would appear to make some strategies impractical.

Zhang said the new rules would apply to any investors using trading software in which orders were set and executed automatically. They would require them to seek approval before participating in algo-trading, with all order information communicated to the regulator.

Given that these strategies often rely on split-second responsiveness to market fluctuations, such oversight could be a major deterrent.

Securities and futures brokers are also being asked to build segregated platforms for algo-traders in order to separate their activities and enable them to be reviewed in isolation.

Further, the regulator is asking brokers to establish a verification system with enhanced risk controls for when they connect to any external automated traders, while it has proposed introducing a black list to penalise those violating the rules, with penalties including a licence suspension or outright ban.

The regulator added that overseas algo traders would be prohibited from placing orders in the domestic market altogether, while local algo traders would be prevented from linking to international algo systems without CSRC approval.

It added that both Shanghai and Shenzhen bourses would be allowed to charge a different set of fees to algo traders, although it did not specify what those would be.

Shanghai-based market intelligence firm Red Pulse observed that CSRC’s proposals were seeking to crack down on institutional trading firms, when 70% of A-share investors were retail players who didn’t engage with such platforms.

The biggest impact onshore would be on futures investors, argued Red Pulse, given that an estimated 30% of them use program trading.

Zhang said CSRC acknowledged there were some advantages to algo trading in a marketplace, including providing liquidity and improved price discovery.

But he countered that the practice of automated trading could also increase market volatility and pile technological pressure on a market’s trading systems, to the point where it was no longer a level playing field for all participants.

Zhang pinpointed three over-riding reasons why China’s specific market characteristics demanded additional regulation on algo trading.

“The development [of China’s capital markets] is to serve its economy,” he noted. “Using algorithmic trading to boost liquidity is not a consideration, because the market liquidity is sufficient now.

“Secondly, China’s securities market is dominated by retail investors, while algorithmic systems are mainly used by institutions, so over-development of algo trading would lead to an unfair trading environment for retail investors.

“Thirdly, speculation is still an obvious problem in the market. There is a long way to go before we can improve price discovery through algorithmic trading.”

In total the CSRC is seeking feedback on 25 proposed rules in six areas, although full details were not revealed at the briefing.

The regulator said it would give its verdict and announce new policy at the conclusion of the consultation, although it was not clear when that would end and so how long the process would take.

The move comes after the regulator launched a crackdown on short-selling this summer, blaming it in part for wild swings that saw the benchmark CSI300 Index plummet 32% in a month from June 9 to July 8.

In all 43 trading accounts including one under the mainland joint venture of Chicago-based hedge fund Citadel, were either suspended or warned by the two bourses in Shanghai and Shenzhen this August, as reported.