On May 15, in order to implement the provisions of the Securities Law on the supervision of programmatic trading in the securities market and promote the standardized development of programmatic trading, the China Securities Regulatory Commission formulated and issued the Administrative Provisions on Programmatic Trading in the Securities Market (Trial), which will be officially implemented from October 8, 2024. It is clearly stated that the supervision of high-frequency trading will be strengthened, and the northbound programmatic transactions will be clearly included in the reporting management in accordance with the principle of consistency between domestic and foreign investment, and the transaction monitoring standards will be implemented.

The trial regulations for the supervision of high-frequency trading have been released

The "Administrative Provisions" make comprehensive and systematic provisions on the supervision of programmatic transactions in the securities market, which is an important measure to strengthen the supervision of market trading behavior.

First of all, the definition of programmatic trading is clarified, which refers to the act of automatically generating or issuing trading instructions on the stock exchange through computer programs, and the relevant activities should follow the principle of fairness and shall not affect the security of the stock exchange system or disrupt the normal trading order.

The second is to clarify the reporting requirements, programmatic trading investors should report the basic account information, capital information, transaction information, etc. according to the regulations, and implement the "report first, then trade" requirement, and only after fulfilling the reporting obligations can they carry out programmatic trading.

The third is that the stock exchange implements real-time monitoring of programmatic trading and focuses on monitoring abnormal trading behaviors. At the same time, the customer management responsibilities of securities companies are consolidated. The fourth is to clarify the regulatory requirements for technical systems, trading units, hosting, and access to trading information systems related to programmatic trading.

The fifth is to clarify the definition of high-frequency trading, and put forward differentiated regulatory requirements in terms of reporting information, fees, transaction monitoring, etc. Sixth, if institutions and individuals related to programmatic trading violate relevant regulations, stock exchanges, industry associations, the China Securities Regulatory Commission and their dispatched agencies may take regulatory measures or impose penalties in accordance with the law.

Seventh, it is clarified that Northbound programmatic trading shall be included in the reporting management and implementation of transaction monitoring standards in accordance with the principle of consistency between domestic and foreign investment, and the specific measures shall be formulated by the Shanghai and Shenzhen Stock Exchanges.

Both domestic and foreign capital are included in the 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 system.

The regulation of Northbound programmatic transactions is not to treat Northbound investors differently or discriminately, but to treat them equally, and to effectively safeguard 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.

The fundamental-based mid-frequency strategy will become a quantitative trend

In the face of the strong regulatory trend of the industry in recent years, quantitative private equity is also actively responding and changing. First of all, there have been new changes in the filing of many quantitative private placements, and the previous traditional enhancement strategy has gradually shifted to the air index increase strategy, and the number of filings of air index increase strategy products has increased significantly recently.

The second is compliance talents, and there are quantitative private placements with high salaries to recruit compliance talents, specifically to cooperate with the implementation of compliance management by regulatory authorities. The job requirement is to follow up and study regulatory policies and cooperate with the regulatory authorities to implement the compliance management of private equity funds.

The third is the trend of quantitative frequency reduction, and the capacity of high-frequency strategies is small, so it needs to be expanded to medium and low frequencies to accommodate larger strategic space. In order to cope with this change, quantitative private equity also has a new situation in talent recruitment, according to the information of major recruitment websites, stock low-frequency fund managers and researchers have become the current hot demand for quantitative private equity recruitment.

Effective supervision and standardized development

The China Securities Regulatory Commission said that programmatic trading is the product of the integration and development of information technology and the capital market, which started late in China's market and has developed rapidly in recent years, and has become an important trading method in the securities market. Programmatic trading helps provide liquidity to the market and facilitates price discovery. However, programmatic trading, especially high-frequency trading, has obvious advantages in technology, information and speed over small and medium-sized investors, and there are also problems such as strategy convergence and trading resonance at some points in time, which increases market volatility.

The Administrative Provisions have created a stricter regulatory environment, and at the same time provided investors with clearer trading norms, prompting the investment industry to develop in a more standardized and professional direction. Under the increasingly perfect management framework, institutions that punish illegal trading behaviors will enable active and compliant investment institutions to obtain better development opportunities in the market, which will help enhance the credibility of the entire industry and the confidence of investors.