China to draw "red line" on algorithmic trading

File photo shows an exterior view of the Shanghai Stock Exchange at Pudong New Area in Shanghai, east China. (Xinhua)

BEIJING, July 10 (Xinhua) -- The China Securities Regulatory Commission (CSRC) on Wednesday announced plans to delineate a "red line" for algorithmic transactions, especially high-frequency trading, to enhance supervision.

A spokesperson for the top securities watchdog said stock exchanges will be guided in the swift release and implementation of monitoring standards as part of a broader strategy to reduce the frequency and speed of algorithmic trading.

In addition to setting clear boundaries, the commission will introduce differentiated fee structures for high-frequency quantitative trading. This will involve studying and establishing additional charges such as traffic fees and cancellation fees based on indicators like the number of submissions and cancellation rates in order to increase costs and thereby reduce trading speed.

Algorithmic trading, also called automated trading or algo-trading, uses a computer program that follows a defined set of instructions to place a trade. The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader. High-frequency trading is a trading method that uses powerful computer programs to transact a large number of orders in fractions of a second.

The spokesperson stated that the CSRC will guide the exchanges to expedite the formulation of detailed rules for the management of algo-trading. Exchanges will be directed to assess and improve the reporting system for such transactions, enhancing the verification of reported information and the intensity of on-site inspections.

In a bid to align regulatory standards, the CSRC is also stepping up communication and coordination with authorities in China's Hong Kong Special Administrative Region, with urgency to formulate and release guidelines for the reporting of algo-trading by northbound funds. This will ensure that northbound investors are subject to the same regulatory standards as domestic investors.

Continuous reinforcement of the monitoring and supervision of trading behavior is also on the agenda. The CSRC is determined to crack down on any illegal and non-compliant activities involving algo-trading, particularly high-frequency quantitative trading, in accordance with the law.

Algo-trading in China's securities market has declined this year. As of the end of June, there were over 1,600 high-frequency trading accounts in the entire market, a decrease of more than 20 percent year on year. The behavior that triggers the abnormal trading monitoring standards has seen a nearly 60 percent drop in the past three months.