Caixin Weekly | High-Frequency Trading Embraces Regulation (AI Translation)

财新周刊｜高频交易拥抱监管

Chinese regulators and exchanges have been targeting high-frequency trading (HFT) with a series of policies, including increased trading fees, cancellation of rebates, and stricter monitoring, which have caused a significant decline in HFT activities and profitability within the Chinese market[para. 1]. Caixin previously highlighted how foreign high-frequency traders often operate covertly and profitably within China's futures market and the limited legal ways these institutions have to participate in the market[para. 2]. Most foreign high-frequency traders have resorted to registering local trading companies to benefit from national treatment, although this is seen as a regulatory loophole rather than a legitimate method[para. 3]. High-frequency trading has faced increasing scrutiny during market downturns, often blamed for exploiting retail investors[para. 4]. The Chinese Securities Regulatory Commission (CSRC) has emphasized the need to strengthen the monitoring and regulation of HFT to protect small and medium investors, and to improve market stability and development[para. 5],[para. 6].

The Shanghai, Shenzhen, and Beijing Stock Exchanges have completed consultations on regulations specific to program trading, including criteria to identify high-frequency trading, significantly impacting the sustainability of high-frequency trading strategies[para. 7]. Some foreign high-frequency traders have attempted to legitimize their operations by acquiring private fund manager licenses from the Asset Management Association of China (AMAC), but have faced significant practical challenges resulting in many withdrawing their applications[para. 8],[para. 9]. The insider reports that trading fees have almost doubled for high-frequency traders due to the lack of fee rebates, severely impacting their profitability and leading to consideration of alternative markets like India[para. 10],[para. 11].

The recent increase in fees and earlier policies targeting declaration fees and trading limits have led to a significant drop in the volume of high-frequency transactions by 70% to 80%, making professional high-frequency strategies less advantageous[para. 12],[para. 13]. This has affected the overall operational performance of futures companies, leading to a significant decline in operating revenue and net profit for the industry[para. 14]. Despite significant challenges, some believe the Chinese market still possesses resilience and room for regulatory adjustments. However, compliance with specific methods and approaches remains an area needing greater precision[para. 15],[para. 16].

High-frequency traders in China have faced additional barriers due to compliance and public opinion, contemplating private fund manager licenses as a workaround. However, procedural complexities and failures to conform to regulatory requirements have plagued their attempts, leading to the termination and withdrawal of applications[para. 17],[para. 18]. Proprietary trading and asset management are distinct industries, and some believe that transforming into asset managers may not suit high-frequency traders due to the fundamental differences in operational models[para. 22],[para. 23].

There has been significant discourse around whether HFT disrupts market fairness, increases volatility, or provides predatory liquidity. While some see HFT as providing necessary liquidity and price discovery, others contend that it provides false liquidity and harms retail investors[para. 33]. There is a consensus that HFT does not instigate market volatility but rather absorbs volatility to some extent. Known for stable performance in proprietary trading but experiencing volatility in asset management, the capabilities of HFT firms in asset management are viewed with skepticism[para. 25],[para. 26],[para. 27]. Consequently, regulators have remained cautious, requiring HFT firms to substantiate their genuine intent and capability in managing assets[para. 30],[para. 31].

Globally, regulations for high-frequency trading have evolved, with jurisdictions like Europe, the US, and Japan imposing specific licensing and operational requirements. Japan, in particular, has made significant strides by obligating HFT firms to register and maintain rigorous internal controls, which can offer regulatory insights for China as these models emphasize market integrity while leveraging technological advancements in trading[para. 41],[para. 43],[para. 44],[para. 45],[para. 46]. Japanese regulators emphasize monitoring and the transparency of trading activities while allowing the market to function relatively freely, suggesting a regulatory balance that China's regulatory bodies may consider adopting[para. 47],[para. 48],[para. 49].■