Standardize programmatic trading! The China Securities Regulatory Commission (CSRC) is soliciting public opinions

This article is reprinted from China Securities Journal reporter Zan Xiuli

An important step has been taken in strengthening the supervision of programmatic trading in the securities market.

On April 12, the China Securities Regulatory Commission (CSRC) issued the Administrative Provisions on Programmatic Trading in the Securities Market (Trial) (Consultation Paper) (hereinafter referred to as the "Administrative Regulations"). Among them, it is proposed to consolidate the management responsibilities of securities companies to customers, set abnormal transaction monitoring indicators, draw "red lines" for trading behaviors, standardize the management of technical systems, and clarify the technical system requirements for investors and securities companies.

Zhang Wangjun, director of the First Department of Market Supervision of the China Securities Regulatory Commission, said that the "Management Regulations" closely focus on the main line of strengthening supervision, preventing risks and promoting high-quality development, adhere to the idea of "pursuing advantages and avoiding disadvantages, highlighting fairness, effective supervision and standardized development", and make comprehensive and systematic provisions on the supervision of programmatic transactions. Industry insiders believe that strengthening the supervision of programmatic transactions is a long-term plan to promote the standardized development of the industry and maintain market order. The promulgation of the "Administrative Provisions" directly hits the pain points of the market and highlights the investor-oriented regulatory concept, which is of positive significance for protecting the legitimate rights and interests of investors, especially small and medium-sized investors, and maintaining market fairness.

Promote the development of industry norms

In recent years, programmatic trading in mainland China has developed rapidly and has become an important way of market trading. According to industry analysts, the impact of the programmatic trading market has two sides.

On the one hand, it helps to increase market activity, improve trading efficiency and improve market liquidity.

On the other hand, programmatic trading, especially high-frequency trading, has obvious technical, information and speed advantages over small and medium-sized investors, and there are still problems such as strategy convergence and trading resonance at some points in time, which may increase market volatility.

In the eyes of industry insiders, the promulgation of the "Administrative Regulations" is not a negation of programmatic transactions, but a long-term plan to promote the standardized development of the programmatic trading industry and maintain market order.

Zhang Wangjun said that the "Management Regulations" highlight the whole chain of supervision. For example, by consolidating the management responsibilities of brokerages to customers, it helps to strengthen front-end prevention and control and reduce transaction risks. By setting abnormal transaction monitoring indicators and drawing a "red line" for trading behavior, it helps to maintain market order and promote the smooth operation of the market. By standardizing the management of technical systems and clarifying the technical system requirements of investors and securities companies, it is helpful to improve the security and stability of the system and prevent extreme risk events.

Industry insiders believe that the "management regulations" set abnormal transaction monitoring indicators, draw a "red line" of trading behavior and other measures, will be in the daily supervision process, targeted to solve the excessive use of information advantages, aggravation of information asymmetry and other problems, to create a clean and upright investment environment.

趋利避害

Stricter and differentiated regulatory requirements for high-frequency trading

From the perspective of overseas markets, programmatic trading has triggered a series of risk events. Therefore, overseas markets generally implement stricter supervision on quantitative trading, especially high-frequency trading, to prevent negative impact on market order.

For example, in the 2010 "flash crash" in the United States, traders used programmatic trading to implement a "spoofing" strategy, automatically placing a large number of orders to trigger other investors to sell, and eventually caused the market to plummet. Another example is the 2012 Knight Capital incident, due to a procedural error, the market fell sharply in a short period of time, and investors themselves also suffered huge losses.

In view of this, overseas mature markets generally implement stricter supervision on quantitative trading, especially high-frequency trading. For example, Japan has implemented mandatory registration for high-frequency trading, the European Union has implemented differentiated fees for high-frequency trading, and the United States has recognized the use of programmatic trading to carry out "spoofing" as market manipulation and punished it.

Zhang Wangjun said that the implementation of differentiated supervision of high-frequency trading is neither to reject this trading method nor to let it go, but to reflect the idea of "pursuing advantages and avoiding disadvantages and standardizing development".

Tian Lihui, dean of the Institute of Financial Development of Nankai University, believes that strengthening the supervision of programmatic transactions, especially high-frequency trading, is also based on the realistic choice of small and medium-sized investors in the mainland market.

Maintain a "zero tolerance" high-pressure posture

The China Securities Journal reporter combed and found that the China Securities Regulatory Commission has always paid attention to the development and supervision of programmatic trading, and has successively promoted many tasks in recent years, including including including the inclusion of quantitative trading in the scope of securities laws and regulations, the establishment of a data collection mechanism for leading quantitative institutions, the strengthening of quantitative transaction monitoring and analysis, the establishment of a programmatic transaction reporting system, and the strengthening of private placement and securities lending supervision.

Among them, the Shanghai and Shenzhen Stock Exchanges issued the Notice on Matters Concerning the Reporting of Stock Programmatic Transactions and the Notice on Matters Concerning the Strengthening of the Management of Programmatic Transactions on September 1, 2023, establishing a special reporting system and corresponding regulatory arrangements for quantitative trading, which will be officially implemented on October 9, 2023. The Shanghai and Shenzhen Stock Exchanges announced on February 20 this year that the quantitative trading reporting system has been smoothly implemented.

Earlier, regulators said that the next stage of the introduction of a series of quantitative trading supervision measures, will mature one, 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.

The regulatory authorities have always maintained a strict tone and a high-pressure posture of "zero tolerance" for violations of laws and regulations that affect the normal trading order of the market and harm the legitimate rights and interests of investors.

For example, on February 20, the Shanghai and Shenzhen Stock Exchanges issued a fine for the abnormal trading of Ningbo Lingjun Investment Management Partnership (Limited Partnership), suspended or restricted trading and initiated a public censure procedure.

"The self-discipline management measures taken by Ningbo Lingjun are the embodiment of the regulatory authorities to strengthen the supervision of abnormal trading behaviors. In Tian Lihui's view, relevant measures are also a reflection of caring for the market.

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