US hedge fund Citadel embroiled in China's trading probe

US-based hedge fund Citadel has confirmed that a managed account at its brokerage arm was suspended by the Shenzhen Stock Exchange last Friday.

The move makes Citadel the first foreign firm to become embroiled in China’s crackdown on short selling following weeks of wild A-share swings.

Late last week the Shanghai and Shenzhen bourses suspended 34 trading accounts for three months, claiming such accounts had been involved in abnormal systematic and automated trading, which disturbed the market order. The Shanghai Stock Exchange yesterday suspended an additional four trading accounts and verbally warned five account holders, without saying which firms were targeted.

It comes after the China Securities Regulatory Commission (CSRC), China’s securities watchdog, and the Ministry of Public Security implemented a nationwide campaign to investigate malicious short selling of securities and futures on July 9, after the mainland’s CSI300 index declined by 32% from June 9 to July 8.

Among the suspended accounts, Guosen Futures-Citadel (Shanghai) Trading has drawn the most attention due to the nature of its shareholders – China’s largest securities firm Citic Securities and the Chicago-based hedge fund manger Citadel.

“We can confirm that while one account managed by Guosen Futures-Citadel (Shanghai) Trading has had its trading on the Shenzhen Exchange suspended, we continue to otherwise operate normally from our offices, and we continue to comply with all local laws and regulations,” a spokesperson told AsianInvestor yesterday.

“Citadel has been actively investing in the region for 15 years, and has always maintained a constructive dialogue with regulators, including during the recent market volatility.”

A source familiar with the matter yesterday clarified which Citadel business had been affected by the suspension, since foreign media had incorrectly reported it was a client’s account: “Citadel’s securities, market making and hedge funds businesses are separate entities, while the suspended account this time is under its securities arm. The account is one of Citadel’s proprietary trading account, not from its clients.”

The source added: “Citadel owns more than one account in China as a flexible approach in risk management to diversify relationships in China. The regulator has been also aware that Citadel has more than one [trading] account in China, but only the one on the Shenzhen Stock Exchange has been suspended. Other mainland accounts under Citadel Securities are operating normally, while its hedge fund business is completely separated.”

Guosen Futures–Citadel (Shanghai) Trading was initially a joint venture set up in February 2010, where Citic Securities held 20% of the shares via its subsidiary Shenzhen Citic Union, while Citadel held 80% of the shares via its subsidiary Citadel Global Trading. It has since re-registered as Citadel (Shanghai) Trading, becoming a wholly foreign owned enterprise (WFOE), after Citic offloaded its 20% stake in November 2014. It also doubled its registered capital to $10 million in February this year.

The entity’s business scope is focused mainly on commodities, including imports and exports, consultant services on non-ferrous metal (except precious metal), natural rubber and another nine commodities, according to filings with the Shanghai Administration for Industry & Commerce.

The securities regulator set out reasons for the account suspensions on Monday. A CSRC spokesperson told state-owned media that some individual and institutional accounts had made “abnormal” buying and selling orders on blue chips like PetroChina and Sinopec – these stocks saw especially heavy sales, the regulator claimed, saying such trading had disturbed the market order and misled investors.

The spokesperson noted that such suspended systematic, or high-frequency, trading accounts were characterised by frequent bids and sells, affecting normal share pricings. He said the bourses acted to stabilise the equity market and protect investors’ interests.

Although such automated trading systems could boost market liquidity and assist efficient pricing in normal conditions, they also encouraged speculation and created technical and operational risks, the regulator said. “If such automated trading [systems] are used for market manipulation, it could result in a disaster,” the spokesperson said.

The CSRC said it expected institutions such as securities firms and fund companies to help stabilise the market. The China Securities Finance Corporation reportedly received a total of Rmb2 trillion from the government to stabilise A-share market, which has been partially used for the financing of five new mutual funds amounting to Rmb200 billion.