SHANGHAI (Reuters) – As China’s stock market struggles to get better, regulators have began to probe some hedge funds and brokerages on quantitative trading strategies amid a growing outcry against a sector able to money in on share price falls and volatility, sources said. The China Securities Regulatory Commission (CSRC) has checked with several major brokers over the past weeks about short-selling activities and trading strategies of their quant clients – funds that trade rapidly using derivatives and data-driven computer models, two individuals with direct knowledge of the probe said. Individually, the Shanghai and Shenzhen stock exchanges, under the CSRC’s guidance, have sought information from major quant funds on their money-making strategies, one other source said. “They should know the logic of the trading (strategy), the source of the profit; under which situation you hold net long, or net short positions … and the rationale behind buy and sell orders,” the source said.
The sources declined to be named as they mustn’t authorised to refer to media. The CSRC and the bourses didn’t reply to requests for comment.
Global quant fund houses including Winton and Two Sigma have operations in China, but it surely surely’s not clear if the foreign players are being probed.
Essentially the most recent regulatory scrutiny comes after a slew of market-friendly measures – including a stamp duty cut – didn’t drive a sustainable rally in a struggling market that’s down roughly 5% year-to-date.
The weakness has triggered finger-pointing in social media, along with criticism from fund managers and retail investors against these quant funds and short sellers.
The CSRC had earlier this month vowed to increase scrutiny over programme trading, and a couple of fear fresh probes could lead on on to tighter regulations on short-selling and certain financing activities by hedge funds. The regulatory review shouldn’t be without precedent. During China’s 2015 market crash, Beijing almost shut down the index futures market and blamed shortsellers for the turmoil. PROBE Quant funds in China exceeded 1.08 trillion yuan ($147.94 billion) on the tip of 2021, nearly doubling in size from a yr earlier, based on a report compiled by institutions including Huatai Securities. A number of of China’s biggest quant funds include High-Flyer Quant Investment, Yanfu Investments LLC and Shanghai Minghong Investment Management Co.
A greater understanding of various quant strategies may lead to regulators curbing those that contribute to market volatility, said one amongst the brokerage sources. Short-selling activities by quant funds could also be caught throughout the crossfire, he said.
“Brokerages in China are more willing to lend securities to quants for shortselling consequently of their full of life trading and commission contributions. Nonetheless it’s unfair to other market players who hardly have access to securities lending,” said Yuan Yuwei, fund manager at Water Wisdom Asset Management.
The regulatory inquiry stays to be in its early stage and no conclusion has been made, three of the sources said.
LEVERAGED BETS Regulators have also asked for data around Direct Market Access (DMA), sources said. Through DMA, hedge funds in China can borrow money from brokerages to fund leveraged bets. Borrowing $1 only requires a minimum of 25 cents in deposits. “DMA easily raises eyebrows since it involves high leverage, and allows quant funds to make loads of money,” said a brokerage source. One other brokerage source said the CSRC asked them to elaborate on the scale of their quant clientele and whether quant trading had impacted recent stock market. Yang Tingwu, vice general manager of asset manager Tongheng Investment, supports tighter rules for quant funds, arguing many Chinese quants make lucrative bets on poorly managed firms based on momentum signals, relatively than fundamentals. Quant strategy is a neutral tool, but “in China, it’s getting used to supply liquidity to the bad guys,” he said, referring to listed firms with poor governance.
($1 = 7.3002 Chinese yuan renminbi)
(Reporting by Shanghai Newsroom; Editing by Shri Navaratnam)