China examines quant strategies as market weakness fuels public anger – sources
China examines quant strategies as market weakness fuels public anger - sources
Chinese Regulators Investigate Quantitative Trading Strategies, Prompting Debate on Market Volatility
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Shanghai, Sep 21 – As China’s stock market continues to struggle, regulators are now turning their attention to quantitative trading strategies. In an effort to address growing concerns over market volatility and profits made by hedge funds from falling share prices, China’s Securities Regulatory Commission (CSRC) has launched investigations into select hedge funds and brokerages.
These investigations come in the form of checks conducted by the CSRC with major brokers to scrutinize the short-selling activities and trading strategies of their quantitative clients. The Shanghai and Shenzhen stock exchanges, under the guidance of the CSRC, are also seeking information from major quant funds regarding their money-making strategies.
Unnamed sources with direct knowledge of the probe have revealed that regulators are keen to understand the logic and profitability of these trading strategies. They are interested in knowing under what circumstances net long or net short positions are held, as well as the reasoning behind buy and sell orders.
It is important to note that the CSRC and the stock exchanges have not responded to requests for comment on these investigations.
The rise of quant funds in China has caught the attention of regulators. According to a report compiled by institutions including Huatai Securities, quant funds in China exceeded ¥1.08 trillion ($147.94 billion) at the end of 2021, nearly double the size from a year earlier. Notable quant funds in China include High-Flyer Quant Investment, Yanfu Investments LLC, and Shanghai Minghong Investment Management Co.
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This move by regulators to better understand various quant strategies could potentially lead to curbing those that contribute to market volatility. Short-selling activities by quant funds may also be impacted.
The issue of lending securities for short-selling activities has caused some concern among market players. Some feel that brokerages in China are more willing to lend securities to quant funds due to their active trading and commission contributions. This creates an unfair advantage for these funds over other market participants who have limited access to securities lending.
While the regulatory inquiry is still in its early stages and no conclusions have been made, the probing of quant funds and brokerages is not entirely unprecedented. During China’s 2015 market crash, the index futures market was almost shut down, with shortsellers being blamed for the market turmoil.
In addition to investigating quant funds, regulators are also requesting data on Direct Market Access (DMA). Through DMA, hedge funds in China can borrow money from brokerages to fund leveraged bets. This practice has raised concerns due to the high leverage involved. Regulators are interested in understanding the impact of quant trading on the recent stock market.
The debate on tighter regulations for quant funds has gained traction. Yang Tingwu, the Vice General Manager of asset manager Tongheng Investment, supports stricter rules for quant funds. He argues that many Chinese quant funds make lucrative bets on poorly managed companies based on momentum signals rather than fundamental analysis. Tingwu states that quant strategies are neutral tools, but in China, they are being used to provide liquidity to companies with poor governance.
The outcome of these investigations remains to be seen. However, they reflect regulators’ determination to ensure market stability and transparency. As the Chinese stock market continues its struggle, these actions are part of a wider effort to address concerns and prevent excessive market volatility.
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