The framework of programmatic trading rules is clear, and high-frequency quantification welcomes strong supervision

Securities Times reporter Cheng Dan

The regulatory requirements for programmatic trading are clear.

On May 15, the China Securities Regulatory Commission (CSRC) issued the revised Administrative Provisions on Programmatic Trading in the Securities Market (for Trial Implementation) (hereinafter referred to as the "Administrative Regulations"). It makes overall and framework institutional arrangements for the supervision of programmatic transactions in the securities market, stipulates specific matters such as the management of programmatic transaction reports, transaction monitoring and risk management, information system management, and differentiated management of high-frequency trading, and authorizes the stock exchange to refine business rules and specific measures.

The Securities Times reporter learned that the "Management Regulations" were officially implemented on October 8, leaving sufficient transition period and market preparation time. A number of leading institutions said that the next step will be to actively optimize investment strategies in accordance with the requirements of regulations and participate in market transactions in accordance with laws and regulations.

Establish a general framework for programmatic deals

The issuance of the "Administrative Provisions" is the first time that the China Securities Regulatory Commission has issued rules for the supervision of programmatic transactions, and has initially established a general framework for the supervision of programmatic transactions, which was released on the "May 15 National Investor Protection Publicity Day", which is an important measure to protect the interests of investors.

Zhang Wangjun, director of the First Department of Market Supervision of the China Securities Regulatory Commission, pointed out at a press conference held by the China Securities Regulatory Commission on April 12 that "the Administrative Provisions highlight the maintenance of fairness. Based on the large number of small and medium-sized investors, which is the largest national and market conditions, in view of the advantages of programmatic trading in terms of information and technology, a series of requirements are clarified in terms of report management, transaction supervision, system security, differentiated fees, etc., so as to effectively maintain the fairness of market transactions, control the negative impact, give full play to its positive role, and promote the standardized and healthy development of programmatic transactions. At the same time, highlight the whole chain of supervision, highlight the key points of supervision, highlight the systematic policy, and gradually build a three-dimensional rule system that connects administrative supervision and self-discipline management.

Specifically, the "Administrative Provisions" have a total of 7 chapters and 32 articles, closely focusing on the main line of strengthening supervision, preventing risks, and promoting high-quality development, adhering to the idea of "pursuing advantages and avoiding disadvantages, highlighting fairness, effective supervision, and standardized development", and further making comprehensive and systematic provisions on the supervision of programmatic transactions.

In terms of transaction monitoring and risk management, the Administrative Provisions point out that the stock exchange implements real-time monitoring and monitoring of programmatic trading, and focuses on monitoring abnormal trading behaviors that may affect the security of the stock exchange system or trading order, including the number and frequency of declarations and cancellations in a short period of time to meet certain standards. Securities companies shall sign entrustment agreements with customers, strengthen the monitoring of customers' programmatic trading behaviors, and cooperate with the stock exchange to take relevant measures.

In terms of information system management, the Administrative Provisions require that securities companies shall conduct unified management of trading units in accordance with the regulations, provide relevant services to all types of investors in accordance with the principles of fairness and reasonableness, and shall not provide special convenience for programmed trading investors. Where a stock exchange provides hosting trading custody services, it shall follow the principles of security, fairness and reasonableness, fairly allocate resources, and strengthen the management of entities using hosting services. Securities companies shall, in accordance with the provisions of the stock exchange, reasonably use the hosting trading custody resources to ensure the fairness of transactions between different customers.

Li Tinghan, an analyst at Huabao Securities, believes that the "Management Regulations" aim to promote the development of programmatic trading norms and maintain the order and fairness of market transactions. In terms of market pricing, it can improve the effectiveness of market price signals and smooth market volatility. In terms of the protection of investors' rights and interests, programmatic trading, especially high-frequency trading, has the information and speed advantages over small and medium-sized investors, so as to protect the rights and interests of small and medium-sized investors and maintain the vitality of the A-share market.

Strengthen the supervision of high-frequency trading

The Administrative Provisions make special provisions for high-frequency trading. High-frequency trading refers to the trading behavior of a high number or frequency of declarations and cancellations in a short period of time and a high number of declarations and cancellations in a single day. Zhang Wangjun previously 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".

At present, the stock exchange's screening criteria for high-frequency trading are a maximum of more than 300 declarations per second, or a maximum of more than 20,000 declarations per day. Judging from the screening results, the number of high-frequency trading accounts is generally small, but the transaction amount is large, accounting for about 60% of the programmatic trading volume. From the perspective of overseas markets, high-frequency trading has always been the focus of regulators in various countries.

The Administrative Provisions fully draw on the experience of international market supervision, and from the perspective of maintaining market fairness and trading order, the Administrative Provisions put forward stricter and differentiated regulatory requirements for high-frequency trading, including additional reporting mechanisms, differentiated fees, and appropriate and strict transaction supervision. Specifically, in addition to the general reporting requirements, the Administrative Provisions also require additional information such as the location of the high-frequency trading reporting system server, the system test report, and the system failure emergency plan. The SFC authorizes stock exchanges to increase the fees for high-frequency trading and consider other fees such as order cancellation fees. The stock exchange will focus on the regulation of high-frequency trading.

A 10 billion quantitative private equity person in Shanghai told reporters that standardizing programmatic transactions and strengthening the supervision of high-frequency transactions focuses on the implementation of differentiated fees for high-frequency transactions with higher number and frequency of declarations and cancellations. There is a kind of "spoofing" trading behavior in the market, that is, trying to manipulate the stock market by making false quotations and then canceling orders in the transaction, and creating a false impression in an attempt to deceive other traders, thereby affecting the profit of the stock price. Charging a cancellation fee for those with a higher number of declarations and cancellations will help crack down on "pretense" transactions.

The above-mentioned quantitative person said that the mainland's current programmatic trading investor reporting system has been smoothly implemented, and will be more standardized in the future, which will help improve the regulatory transparency of the quantitative industry, and can also crack down on "fake quantification" and illegal activities carried out by using programmatic trading.

Both domestic and foreign capital are included

Transaction reporting system

The Administrative Provisions make it clear that both domestic and foreign capital are included in the transaction reporting system. Since September last year, the stock exchange has established and implemented a programmatic transaction reporting system. At present, all types of investors, including public offerings, private placements, securities firms and QFIIs, have been included in the reporting scope, and it is only natural for Northbound investors, as participants in the mainland market, to be included in the reporting regime.

Zhang Wangjun said that the regulation of northbound programmatic transactions is not to look at northbound investors differently or treat them differently, but to treat them equally, and effectively maintain the fairness of transactions and supervision for all types of investors.

At present, preliminary ideas for the information report of northbound investors have been studied. In terms of the content of the report, it is generally consistent with that of mainland investors, including basic account information, capital information, trading strategies, etc. In terms of the reporting route, consideration should be given to having investors report to Hong Kong brokers first, and then transferring it to the Hong Kong Stock Exchange to provide it to the Shanghai and Shenzhen Stock Exchanges through the Stock Connect Regulatory Cooperation Arrangement.

When soliciting opinions on the Administrative Provisions before, all parties generally believed that the introduction of the Administrative Provisions would be conducive to maintaining trading order and market fairness, and individual investors hoped to further strengthen supervision. During the consultation period, the A-share market was generally stable, with the Shanghai Composite Index, Shenzhen Component Index and ChiNext Index rising by 2.29%, 2.55% and 3.45% respectively, and programmatic trading investors made small net purchases on average every day. There are no major changes to the Administrative Provisions and the Consultation Draft, and all parties have clear expectations.

Industry insiders pointed out that the "management provisions" is an important measure to implement the provisions of Article 45 of the new "Securities Law", is the implementation of the central financial work conference to comprehensively strengthen the "five major supervision", especially the specific embodiment of strengthening the requirements of behavior supervision, but also to implement the new "national nine" on the "introduction of procedural transaction supervision regulations, strengthen the supervision of high-frequency quantitative trading" requirements of an important means, is an important step to improve the basic system of the capital market, is an important embodiment of strengthening the supervision of behavior, has long-term and positive significance.