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(Bloomberg) — China’s two major stock exchanges announced they will tighten supervision of quantitative trading, following an unusually harsh punishment of freezing the accounts of major funds for three days.
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The Shanghai and Shenzhen exchanges will step up oversight of quantitative trading, especially leveraged products, according to a statement late Tuesday. It would extend the scope of reporting requirements for such transactions to those made by offshore investors via northbound stock connections from the mainland to Hong Kong, and treat foreign and domestic funds alike.
The pledge comes after the exchange sold a total of 2.57 billion yuan ($357 million) of shares to Ningbo Linggun Investment Management Association in less than a minute on Monday, when the index plummeted. It was done after imposing.
The move marks an intensification of efforts by regulators to tighten oversight following the rapid expansion of quantitative hedge funds in recent years as regulators seek to reverse a fourth-year slump in stock prices. . Quantitative funds have sought to allay concerns that they can amplify market volatility and fuel a crash.
While quantitative trading can help with market liquidity and price discovery, such trading has “distinct technology, information and speed advantages” over smaller investors, and at certain points can “amplify market volatility.” ”, the exchange said. Such trading, especially high-frequency trading, is often more tightly regulated in overseas markets to “prevent any negative impact on market order,” they added.
Quantitative hedge funds use computer models to capture trading opportunities in markets ranging from stocks to commodities. Chinese quants often try to outperform a particular benchmark by buying stocks similar to those in the underlying index, but in so-called market-neutral strategies, they do so by shorting stock index futures. Exposures may also be hedged.
“Abnormal transaction”
The Shenzhen Exchange said in a statement on Tuesday that Lingjun executed a sell order at 9:30 a.m. in response to the stock price decline, “disrupting the normal trading order.” The Shanghai Stock Exchange has imposed a similar freeze on the company, banning stock trading until February 22.
A statement from Shenzhen said Lingjun’s sell order constituted “abnormal trading activity” and the company had received multiple warnings for the same reason this year. The stock exchange said it would strengthen its oversight and maintain “zero tolerance” for any actions that undermine investors’ legitimate rights.
Beijing-based Lingjun will “resolutely comply” with the stock exchange’s restrictions and learn its lessons, the company said in a statement posted on its WeChat page. It added that investment accounts managed by the company purchased a net 187 million yuan of shares on Monday.
Lingjun has always been “bullish and long on the Chinese stock market, and his stock positions are always close to full,” the company said. He also pledged to improve the trading model and strictly control the trading process to ensure “smooth and balanced trading.” Lingjun is one of China’s four largest quantitative funds, managing more than 10 billion yuan.
In addition to deregulation, the recent slump in small-cap stocks poses new challenges for quantitative investors. Private quantitative funds lost an average of 7.2% in January, underperforming the benchmark CSI300 stock index, according to Shenzhen Paifang Investment Management Co., Ltd.
Read more: Quantitative hedge fund suffers rare loss due to Chinese stock crash
Quantitative models were “significantly impacted” in the two weeks before Lunar New Year as markets panicked and “many irrational trades” continued, Linjun said in a letter to investors seen by Bloomberg. said. As safety-minded money piled into members of the CSI500 and CSI1000 exchange-traded funds during the week of February 5, these stocks rose significantly and many fund managers are reshaping their stock portfolios to mimic the underlying indexes. The report said it urged adjustments. Such actions caused a “flood of liquidity” from stocks not included in the rising gauge.
Adjusted model
Linggun also adjusted its model and refocused its equity exposure to the top 1,800 listed companies by market capitalization, but returns compared to the benchmark remained weak, according to the Feb. 20 letter. The company upgraded its strategy over the holidays, pledging to get back to alpha “as soon as possible.”
China’s securities regulator took new steps this week underscoring its determination to strengthen the country’s $8.6 trillion stock market. The China Securities Regulatory Commission, headed by Chairman Wu Qingxin, said it would seriously treat opinions, suggestions and criticisms from all parties and immediately implement what is “realistic and workable”. This was said in a statement after the seminar. Companies and foreign institutions in the past two days.
Quants have also faced other regulatory impacts in recent weeks. China’s commodity exchanges ended commission rebates on some programmatic trades this year, and authorities earlier this month prohibited quants from reducing equity positions in certain products to stem a market crash.
The Chinese government’s various economic stimulus measures have contributed to the recovery in Chinese stocks in recent days, but the CSI 300 index remains down less than 1% in 2024 after three consecutive years of decline. There is.
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