China Seeks More Control Over Algorithmic Trades Blamed for Rout

  • CSRC says algorithmic traders are a `double-edged sword'
  • Proposals seen as a further drag on stock-market volume

Chinese regulators are planning to increase their oversight of algorithmic traders, extending a campaign to stabilize the equity market that some analysts say has resulted in shrinking volumes and an exodus by foreign investors.

Under draft rules released by China’s securities regulator on Friday, traders who use automated orders to buy and sell stocks would need to report certain information and wait for a review before they’re allowed to execute their strategies. Orders shouldn’t originate from offshore computers or domestic systems that are remotely controlled from overseas, according to the China Securities Regulatory Commission’s proposal.

The plan is China’s latest effort to crack down on strategies blamed by authorities for exacerbating a $5 trillion stock-market rout. Volumes in the country’s equity-index futures collapsed last month amid government curbs on trading, while turnover in cash equities dropped to a one-year low on Sept. 30. The CSRC’s proposal on algorithmic trades would further weigh on volume, said Wen Zhimin, the Shenzhen-based chief strategy officer at Dacheng Fund Management Co.

"Algo traders often have a very small time window to execute their strategies," said Wen, whose firm’s algorithmic unit has been trading for more than three years. "They can’t do anything if approvals take too long."

‘Double-Edged Sword’

China froze more than 30 trading accounts in August suspected of fueling volatility by using automated trading strategies. One of the accounts was owned by Citadel Securities, the U.S. trading firm started by Ken Griffin.

Price swings on the Shanghai Composite Index have eased from their peak in August, with 10-day volatility plunging by more than half as turnover dried up. The benchmark index climbed 3.4 percent to 3,290.62 at the 11:30 a.m. break on Monday, extending its rebound to 12 percent from an August low.

“Program trading is aimed at making money through arbitrage opportunities and it had an impact on destabilizing the market during the rout,” said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai. “The policy is now to rectify that.”

Algorithmic trading is a "double-edged sword" and needs to be "strictly managed and limited," the CSRC said in a statement on the draft rules. Brokerages would be required to carry out regular inspections to make sure clients are complying with the new regulations, with industry groups given the power to “blacklist” traders who violate the rules, the CSRC said.

The Shanghai Stock Exchange published detailed draft rules on algorithmic trading on Oct. 9. That proposal said traders would need to report their personal details, strategies, server location and source of funding three days before executing trades. The exchange would also introduce daily net buying quotas.

Foreign investors have been withdrawing funds from China amid increased government intervention. They’ve sold a net $4 billion of mainland shares through the Shanghai-Hong Kong exchange link since early July, according to data compiled by Bloomberg.