China’s new trading rules target more oversight, not killing ‘flash boys’, says lobby group

SHANGHAI/SINGAPORE : China’s securities regulators have told market participants that tighter rules for programme trading were not designed to kill the business, but were a response to calls for more oversight, according Asia’s largest financial lobby group ASIFMA.

“There’s no intent to be prejudiced against high frequency trading firms,” said Lyndon Chao, ASIFMA managing director and head of equities and post trade.

“They’re not trying to stop programme trading.”

Chinese bourses had abruptly published rules, effective Oct. 9, that add extra layers of scrutiny and reporting and had stirred anxiety among the “quant” community.

Quant funds in China include global players such as Winton, Two Sigma and D.E.Shaw though these three aren’t members of ASIFMA.

Question and answer sessions hosted by the Shanghai and Shenzhen stock exchanges last week allayed some fears that they aimed to clamp the sector, Chao told Reuters in an interview.

The rules “came out all of a sudden because the regulators might be facing pressure from investors suffering from recent poor stock market performance,” he said.

“They had to come up with something quickly to respond to these concerns, but to do it in a balanced way that it doesn’t disrupt a healthy functioning market.”

The exchanges didn’t reply to Reuters’ requests for comment.

FINGER POINTING

China has over the past few years introduced a slew of derivative products as it opened its retail-dominated stock market wider to foreign institutional investors including quant funds, who demand more arcane products to manage and take risks.

But as China’s stock market struggles in an ailing economy quant funds that use derivatives and data-driven computer models to profit are attracting criticism along with short-sellers – as they have elsewhere and in previous episodes of market weakness.

Early this month well known China economist Ren Zeping called for the government to restrict or even suspend quant trading, arguing such activities “scythe” retail investors and “suck blood” from the domestic market.

Liu Yuhui, another economist, also suggested tighter screws on quant traders, who enjoy an “unfair” edge over retail investors, and erode the core value of the China market.

ASIFMA’s Chao said that such finger pointing is groundless, and that regulators have the matter in hand.

“It’s not fair. There are a lot of quant funds out there that do a great job of injecting liquidity when needed. You need institutional liquidity as well as retail for better balance in the market,” said Chao.

“We’re still digesting the rules …Although I don’t think anyone welcomes additional work, people understand that it still needs to be done,” Chao said.