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Beijing is overhauling how China’s fast-growing quant trading industry is regulated after one of the sector’s largest operators was hit with a trading ban this week for dumping shares.
Stock exchanges in Shanghai and Shenzhen announced late on Tuesday that all market activity by computer-driven quant funds, which rely on complex automated trading strategies, would be closely scrutinised under a new monitoring scheme jointly run by both bourses and the China Securities Regulatory Commission.
New quant funds will be required to report their investment strategies to regulators before they begin trading, according to the announcement. The rule will also apply to offshore quants trading shares through Hong Kong’s Stock Connect programme.
The move marks an escalation of official efforts to combat a protracted equity market sell-off spurred by China’s slowing economic growth and a property market crisis. Recent measures range from large-scale buying by state-run financial institutions to restrictions on mutual funds’ ability to sell shares.
The overhaul follows a three-day trading ban on Ningbo Lingjun Investment announced on Tuesday by the Shanghai Stock Exchange. It accused the company of “affecting the normal trading order or security of this exchange” through automated transactions. Shenzhen’s exchange issued a similar statement.
Both bourses focused on Lingjun’s sale of roughly Rmb2.6bn ($360mn) worth of Shanghai- and Shenzhen-listed shares during the first minute of trading on Monday, when Chinese markets reopened after 10 days off for the lunar new year holiday.
The company, whose chief investment officer is a former trader from global asset manager WorldQuant, said it “sincerely apologises for the negative impact caused” by the large-scale selling. But Lingjun added that it had ultimately made net purchases worth about Rmb187mn by the closing bell on Monday.
Some Chinese fund managers privately questioned regulators’ focus on the first minute of trading and said the move was likely motivated by a desire to slow the pace of selling.
“How do they know how much impact their selling will have on market trends within a few dozen seconds of the open?” a Shanghai-based private equity fund manager said. “Aren’t other institutions also selling at the same time? Shouldn’t the exchange check all selling institutions within those 60 seconds?”
Quant funds in China have come under greater scrutiny over the past six months from market regulators, who face pressure from leaders to halt a long sell-off that has brought the country’s benchmark CSI 300 stock index down more than 40 per cent from a peak in early 2021.
Analysts at Man Group, the world’s largest publicly listed hedge fund, this week described recent ructions in the sector as a “quant quake” comparable to the quant sector meltdown in 2007.
In a note on Tuesday, the analysts said recent market volatility in China had increased hedging costs for many quant funds, which had short-sold index futures to hedge their bullish bets on smaller stocks.
When state-run groups began buying larger stocks to support the market, it drove up benchmark indices, forcing the quant funds to sell their holdings of smaller stocks as the bets against those benchmarks went bad.
“These incidents underscore the perils of crowding and leverage, which can, at times, be significant contributors to systemic risk,” the analysts wrote.
