After a three-day pause, how will the resumption of trading by private equity giant Lingjun affect the market?

Finance Associated Press, February 23 (Reporter Yan Jun) 1 minute of a large number of selling, ended at the cost of three days can not be traded, on February 23, Lingjun Investment officially resumed trading on the Shenzhen Stock Exchange and the Shanghai Stock Exchange.

On February 20, the Shanghai and Shenzhen Stock Exchanges punished the quantitative private equity giant, and Lingjun Investment was suspended from account trading by the Shanghai and Shenzhen Stock Exchanges for three days due to abnormal trading behavior, and initiated the public censure record punishment procedure. This is the first time that the new regulations on programmatic trading have been imposed in September last year, and it is also the first time that the regulator has taken action to increase market volatility in quantitative trading, which has attracted widespread attention in the industry.

In the three days that Lingjun Investment has been restricted from trading, what has quietly changed?

For the market, the Shanghai Composite Index continued to rise sharply, recording 7 consecutive positives, setting a record in the past three and a half years;

For quantitative private placement, with the recovery of the market, the Wind Micro Cap Index has risen by nearly 12% in three days, and quantitative bulls have recovered the "lost ground" since February, and the net value has turned positive, and the industry is also reflecting on whether it can avoid the stampede brought by strategic convergence next time;

For investors, net worth is repaired and investment losses are reduced, but concerns about quantitative private placement have not been eliminated, and the channel is facing redemption pressure from investors.

"If Lingjun can take the initiative to reduce fees and stabilize and rebound in performance, important channels, including brokers, are willing to cooperate with them to stabilize customers, but if it continues like this, the redemption pressure will not be small. The person in charge of the business of the relevant institutions of the brokerage said.

Lingjun Investment resumed trading today

Looking back at the punishment of Lingjun Investment, it involves abnormal trading behavior, which reflects the close tracking and strict supervision of quantitative private placement by the current regulators.

On February 20, the Shenzhen Stock Exchange and the Shanghai Stock Exchange respectively issued regulatory action decisions to the quantitative private placement of Lingjun Investment. On February 19, from 9:30:00 to 9:30:42, Lingjun Investment automatically generated trading instructions through computer programs and placed a large number of orders in a short period of time, selling a total of 1.372 billion yuan of Shenzhen stocks, during which the Shenzhen Stock Exchange Component Index fell rapidly, and from 9:30:00 to 9:31:00 on the same day, Lingjun Investment sold a large number of Shanghai stocks totaling 1.195 billion yuan within one minute, during which the Shanghai Composite Index fell rapidly for a short time. The two exchanges suspended the trading of the Lingjun account for three days and initiated the disciplinary process of public reprimand.

Lingjun Investment subsequently responded, saying "resolute obedience", a deep review, and an apology to the investment. According to the announcement, the company attaches great importance to the problems existing in the product transaction and has carried out deep internal reflection and review. On February 19, 2024, the company's management products bought a net of 187 million yuan throughout the day, but the trading volume was large within one minute of the opening of the day, and the company sincerely apologized for the negative impact caused by this.

After the fine was issued, the regulator once again showed a "combination punch" around quantitative trading, and the exchange emphasized that the previously established special reporting system for quantitative trading has been smoothly implemented. Subsequently, the exchange will focus on the strict implementation of the reporting system, directly pointing to six major measures such as strengthening the supervision of abnormal transactions and abnormal order cancellation. The China Securities Regulatory Commission also said that a series of measures for the supervision of quantitative trading will mature and launch one, and fully strengthen communication with all kinds of investors in the market, grasp the rhythm and intensity of work, promote the standardized and healthy development of quantitative trading, and maintain the stable operation of the market.

What also needs to be clarified here is whether the penalty for Lingjun Investment means that the regulation restricts institutional investors from net selling stocks at the opening and closing stages?

A spokesman for the China Securities Regulatory Commission said yesterday evening that the regulatory authorities will not interfere in normal market transactions, protect investors' rights to trade fairly and freely in accordance with the law, and resolutely crack down on violations of laws and regulations such as disrupting the order of market transactions. Recently, the Shanghai and Shenzhen Stock Exchanges have taken regulatory measures against the abnormal trading behavior of individual institutions in accordance with regulations, which is a measure to perform transaction supervision duties, not to restrict selling.

The China Securities Regulatory Commission also said that in the next step, it will guide the Shanghai and Shenzhen Stock Exchanges and the China Financial Futures Exchange to improve the regulatory standards for abnormal transactions, crack down on illegal acts such as market manipulation and insider trading in accordance with laws and regulations, and effectively maintain the normal trading order of the market.

The quantitative private equity net value was quickly restored, and the redemption pressure is still there

What happened to the industry within three days of Lingjun investment being restricted?

Regulatory penalties are superimposed on top of the sharp drawdown in net worth, triggering a crisis of confidence in quantitative private placements. A number of brokerage channels said that Lingjun Investment's customer base was "fried" on the same day, and there were many doubts, and institutions were also trying to appease investor sentiment.

Fortunately, the "luck" of quantitative private placement is not too bad, after Central Huijin continued to buy and supervise a number of measures, the A-share liquidity crisis was lifted, and the Wind Micro-cap Stock Index also bottomed out, with the index rising by 31.82% for 5 consecutive days. On February 22, it was reported that the return of a quantitative giant's quantitative long product was estimated to exceed 17% in the past 4 days, and the yield turned positive in February, recovering the previous losses.

According to this week's performance estimate of a quantitative private placement obtained by the reporter from the channel side, the yields of a number of quantitative private equity products of the CSI 1000 Index Increase, CSI 500 Index Increase and stock long strategy products have turned positive. As the market rose, even Lingjun Investment, which did not trade, recovered its net value.

A quantitative private equity person said that most customers are pragmatic, and after the net value is repaired, they have calmed down relatively and questioned quantitative private placement. However, the payment pressure on Lingjun investment customers is still there, and some channel sources said that customers, especially those in the banking channel, will be relatively cautious, and there is still continuous payment pressure.

There are also concerns about stampedes between different channels. "We are still negotiating with Lingjun Investment, but now the progress is not smooth, and the rates and redemption restrictions are not very friendly to the channel. A source said.

Quantitative Private Equity Reflection: Avoid excessive use of leverage and reduce strategic relevance

Many quantitative private placements said that Lingjun Investment was "not unjust" to be fined for abnormal transactions, just as the qualitative nature of the regulator, there are also problems such as strategy convergence and transaction resonance at some points in time, which increases market volatility.

"The recent quantitative private placement stampede has also exposed the risks of current domestic quantitative trading. A quantitative private equity person said that excessive use of leverage, failure of convergence strategies, and panic redemptions of quantitative private placements caused by market volatility.

Some observers pointed out that the reason for this crisis is that the quantitative strategy is extensive, the homogeneity is serious, and the channel only "returns and excess first", forgetting the risk. After the intensive issuance of snowball products was knocked in, the crisis was triggered, and some private placements complained that brokerages restricted the net selling of DMA products to cause net value backtesting, but objectively speaking, the regulatory restrictions were very correct this time, saving the entire index and giving opportunists a good education. There is nothing wrong with derivatives, but it is wrong to use them for excessive speculation.

Other industry insiders pointed out that the excessive use of leverage magnifies the negative impact of strategy-driven. As a highly volatile and high-cost derivative product, DMA is especially affected by the poor liquidity of micro-cap stocks with a circulating market value of only 500 million to 2 billion. When there is a slight pressure on selling, DMA product strategies tend to converge and form a collective stampede.

"Due to the collective huddle of micro-cap stocks, ultra-high leverage and return rate have led to the rapid expansion of the scale of DMA products, resulting in a shortage of products for a while, and even some quantitative institutions have increased the return of external funds to 50%. The above-mentioned person pointed out that the regulator has seen the risks brought by the DMA business and twice restricted the scale of the new addition, and recently some private placements have received a notice from some brokers, once again emphasizing that managers are not allowed to add DMA quota. As early as 4 months ago, the regulator has required that the scale of DMA business should not be increased beyond the end of November 8, 2023. From the perspective of the industry, after the end of the liquidity crisis of micro-cap stocks, the scale of DMA business has declined, and the supervision is equivalent to lowering the upper limit of DMA product size again.

The three directions call for standardizing the development and development of the quantitative private equity industry

The crisis has also brought some enlightenment to the future development of the industry, and reducing the relevance of strategies, standardizing channels "sales and excess first", and enriching index tools have become the three major directions with high demand in the industry.

An institutional person told the Financial Associated Press reporter that how to reduce the relevance of its own strategy has become a core problem, and it is also a problem that the domestic quantitative industry needs to solve urgently.

"An important problem faced by the domestic quantitative industry is that the similarity between databases and factors is too high, especially in the case of convergence strategies, and the strategic correlation of major quantitative institutions is significant. When the market is down, this correlation is superimposed and amplified. The person believes that in addition, in the context of strong supervision, how to make full use of the superposition effect of policy factors and respond more flexibly to policy changes is also an important factor to test the strength of the quantitative team.

In addition to the problem of strategic convergence that needs to be solved, some industry insiders pointed out that the overall atmosphere of the channel "sales and only excess first" also needs to be reversed, and the trigger point of the A-share market crisis lies in the concentrated knock-in of the snowball, which is a hidden danger buried by the brokerage channel to package a risky sell put option into a fixed income product and sell it to wealth customers. In order to compete for the list, various managers have obtained long returns by exposing a large number of risk factors, and have lost the original intention of the alpha strategy.

In addition, some industry insiders suggested that index hedging tools and securities lending tools should be enriched, and it was recommended to open CSI 2000 stock index futures as soon as possible. Strictly monitor the naked short, but support pure hedging strategies and neutral strategies, and limit arbitrage speculation in online celebrity coupons, new stocks, and sub-new stocks.

(Financial Associated Press reporter Yan Jun)