China Bans High Frequency Trader as Quant Trading Crackdown Expands

Just days after China cracked down on quant funds, Beijing took our advice (from around 2009) and started cracking down on the market parasites better known as HFTs (which Michael Lewis decided to give a starring role in his 2014 book Flash Boys about five years after we first popularized this market segment).

One week after Beijing suspended Lingjun Investment, one of China’s largest quant funds for three days, on Thursday, China also banned another top-performing quant fund from the stock-index futures market and vowed tighter oversight of high-speed trading, expanding a crackdown on computer-driven investment strategies that some have blamed for exacerbating market turmoil (funny how nobody blames (15 years later, we still find it funny how nobody ever blames algos for surging stock prices, just for crashes).

The China Financial Futures Exchange banned Shanghai Weiwan Fund Management from opening stock index futures positions for 12 months, while confiscating 8.9 million yuan ($1.2 million) in illegal gains, the bourse said in a statement late Wednesday.

The hedge fund had allegedly used high-frequency trading to circumvent transaction limits on multiple equity index futures, the exchange claimed. It also failed to disclose the links between accounts by its controller and relatives and accounts used for managing its products.

Shanghai Weiwan was the top performer for the CTA strategy in 2022 among managers with less than 500 million yuan, with a 105% gain through November of that year, according to Shenzhen PaiPaiWang Investment & Management Co. One of its products was ranked 19th among all CTA strategies by managers with less than that amount over the past year.

The penalty marks an escalation of scapegoating a clampdown on quant trading, as regulators try to shore up confidence in the stock market after three years of losses, and somehow blaming algos is supposed to open the floodgates and see billions flow right back into the Chinese market (without trillions in fiscal stimuli from Beijing first).

It also shows the strong resolve of Wu Qing, who was named chairman of China Securities Regulatory Commission in early February, to punish wrongdoing. Wu pledged to enhance judicial protection and law enforcement efficiency in the stock market to stabilize expectations and foster its long-term development, according to a CSRC statement late Wednesday.

The latest moves suggest the regulator is shifting to a more “results-oriented” stance, said Yu Yingbo, a fund manager at Zhuhai Wanfang Investment Management Co. Rather than just plugging loopholes, “once they identify a certain type of strategy they want to quell, it’s an all-round chase with measures to prevent it from ever cropping up again.”

As reported before, China already took aim at quant funds, which relied on computer-driven trading to outperform the market for much of the last three years. The group fell under scrutiny after being blamed for worsening a market slump with their “Direct Market Access” products, which typically use swap contracts and are often highly leveraged. Ironically, the crackdown on DMA products led to the first sharp drop in Chinese stocks after what was a multi-year long stretch of gains for the Chinese market.

Some quant funds that manage DMA products for clients were told to stop accepting new inflows and phase out their existing products, in a gradual exit that would help prevent drastic selloffs, Bloomberg News reported this week. Some of the DMA funds had earlier been barred from paring positions by regulators trying to stem the market rout.

Also earlier this month, the Shanghai and Shenzhen stock exchanges froze the accounts of major quant fund Ningbo Lingjun Investment Management Partnership for three days earlier this month, after it dumped a combined 2.57 billion yuan in shares within a minute as markets declined, a move deemed as “disrupting normal trading order.”

The bourses had since vowed to tighten supervision of quant trading, especially leveraged products, and expand the scope of required reporting of such trades to offshore investors via the stock links between Hong Kong and mainland China.

The CSRC will guide stock exchanges and the financial futures bourse to step up coordinated oversight of all trading behavior, including high-frequency trading, and crack down on illegal activities, it said in a separate statement Wednesday. Regulatory oversight will be stepped up across the board, it added.

The government’s forceful measures have helped prop up the market at least temporarily, with the benchmark CSI 300 index jumping about 10% from its five-year low hit earlier this month. Still, some analysts have questioned whether the interventions come at the expense of efforts in recent years to develop a free market.

As Bloomberg write Mark Cranfield notes, the crackdown on quants, along with restrictions to net selling in the first and last 30-minutes of the day, may improve long-term stability for China’s stock markets, “but active traders will be dissuaded as they don’t like entering markets which reduce leverage and inhibit free flow of funds. Hedge funds especially will deploy capital to trading centers perceived to be fully open for business.” For now, however, China has managed to arrest the recent meltdown that wipeout more than $6 trillion in market cap, and the result is that China’s CSI 300 has been the best performing global market in February.

Whether or not that continues is a different matter entirely.