How Will Traders Become Compliant With Tight Regulations For High-Frequency Trading? (AI Translation)

【周刊提前读】高频交易遇强监管 交易商如何走向合规？

In recent years, efforts to regulate high-frequency trading (HFT) in China have intensified, leading to multiple challenges for foreign trading firms operating in the market. A key issue affecting these firms is the continuous rise in application fees, the cancellation of exchange rebates, and significantly increased trading costs, rendering high-frequency strategies largely ineffective [para. 1].

High-frequency traders in China conduct a large volume of transactions and reap considerable profits, often disguising their activities behind trading companies. Legal pathways for foreign institutions to engage in China's futures market are limited, including participation in specific approved commodities through direct trading or the QFII (Qualified Foreign Institutional Investor) channel [para. 3][para. 4]. Despite following regulations, these practices are often viewed as operating in a grey area [para. 4].

Amidst heightened public scrutiny and regulatory pressures, these entities face allegations of making massive profits and transferring funds abroad, attracting condemnation. The China Securities Regulatory Commission (CSRC) has stated plans to enhance regulation and monitoring of high-frequency trading to ensure market stability, particularly protecting small and medium investors who dominate the market [para. 5][para. 6]. This involves balancing the benefits of high-frequency trading while mitigating its negative impacts, enhancing system security, and promoting the healthy development of capital markets [para. 7].

China's exchanges, such as the Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE), and Beijing Stock Exchange (BSE), have established procedural rules to manage high-frequency trading [para. 8]. Measures have included raising reporting fees, controlling trading volumes, and using other methods to curtail high-frequency activities. Some foreign high-frequency trading firms aspire to become legitimate by applying for private fund manager licenses, but practical obstacles often hinder this transformation [para. 9][para. 10][para. 11].

Changes in transaction fees have severely impacted high-frequency trading strategies. The absence of fee rebates has caused trading costs to multiply, affecting both medium and smaller firms significantly [para. 14][para. 15]. The practice of "trading rebates" has become controversial as it deviates from its initial intention to support futures companies, exacerbating commercial competition and leading some futures companies to charge commissions below cost levels [para. 15][para. 16]. As a result, the overall trading volume and profits in the futures market have declined, impacting many firms’ financial health [para. 17][para. 18][para. 19].

Efforts to transition from proprietary trading to asset management have met with challenges; only one firm successfully secured a private fund manager license, which was later revoked. Attempts by other high-frequency firms to gain regulatory approval have also faltered [para. 20][para. 21][para. 22].

Foreign high-frequency traders have been criticized for “disrupting the market,” increasing volatility, and “skimming off profits.” Although these allegations lack substantiated evidence, a perception persists that they crowd out other orders and reduce true market liquidity [para. 42][para. 43]. However, advocates argue that high-frequency trading provides essential liquidity and risk management benefits [para. 47][para. 48].

Globally, regulations on high-frequency trading vary. In the U.S. and Europe, HFT operations require certain licenses but aren't forbidden, while Japan demands registration and detailed reporting. Many trading firms find Japan's regulatory environment favorable due to transparent requirements and a supportive stance towards HFT [para. 53][para. 54][para. 55].

In conclusion, while increased regulation in China aims to stabilize the market and protect smaller investors, it has imposed significant operational and financial burdens on high-frequency trading firms, prompting some to reconsider their position in the market or seek alternatives abroad [para. 58][para. 62].