Quant trading rules to boost confidence

Chinese regulators' prompt supervision of quantitative trading will help narrow the gap between programs and individual investors in terms of technology, access to information and speed, thereby boosting the confidence of A-share investors and sustaining the stability of the market in the long run, according to market mavens.

The mainland's three major stock exchanges in Shanghai, Shenzhen and Beijing released on Friday rules on quant trading, or program trading, and solicited public feedback till June 14.

The rules cover six major areas — the management over reporting, trading activities, information systems, high-frequency trading, quant trading via the stock connect program linking the Shanghai, Shenzhen and Hong Kong bourses, as well as supervision.

These rules have addressed the trial regulation on quant trading released by the China Securities Regulatory Commission on May 15.

Scheduled to take effect on Oct 8, the regulation promulgated by China's top securities watchdog included stricter requirements on supervision, technical systems, trading units, as well as reporting information on accounts, capital, trading and software when it comes to quant trading.

Experts from Shanghai DeepWin Private Equity Management said that the rules clearly define high-frequency trading and abnormal stock trading that might undermine system safety or normal trading of the exchanges.

Rules regarding "abnormal instantaneous declaration rates" will help prevent the problem of system overload caused by the influx of a large number of orders in a very short period of time. This will ensure the stability and security of the trading system. The restrictions on frequent and instantaneous order cancellations can also effectively reduce market noise, hence maintaining the fairness and transparency of the market, said the experts.

A stricter supervision over the "frequent rise or suppression of stock prices" will prevent misleading messages by certain investors via small-scale price manipulations.

The rules also touch upon management of a large amount of trading within a short period of time. This will prevent drastic market volatility and ensure the stability of indexes, they added.

Experts from Wenbo Fund, a Shanghai-based PE fund specializing in quant trading, said the rules on high-frequency trading will limit the room for such methods. Investors who used to favor such trading will focus more on long-term investment, which is conducive to the stability of the Chinese capital markets, they said.

During a news conference in April, Zhang Wangjun, an official of the CSRC, said that program trading accounts for over 50 percent of the total trading value in some mature markets. Due to its rapid development in China over the past few years, program trading forms about 29 percent of the trading value of the entire A-share market now.

Program trading has boosted market activity, enhanced trading efficiency and improved liquidity to some extent. However, since individuals form the majority of stock market investors in China, it is necessary to take a tighter grip over program trading, especially high-frequency trading, as it is superior to retail investors in terms of technology and speed, Zhang said.

Strict supervision over quant trading is seen across major mature markets, given the fact that quant trading companies may adopt the same strategies during certain periods, aggravating market volatility, he added.

Chinese regulators have stepped up supervision over quant trading lately. On Feb 20, both the Shanghai and Shenzhen exchanges announced a three-day trading ban on leading quant fund Lingjun Investment for abnormal selloffs a day earlier.