China’s quant funds have an edge on foreign rivals, even as Beijing curbs trading speed

China's quantitative funds maintain a competitive edge over foreign rivals, despite Beijing's efforts to equalize trading speed, according to Xia Chun, a leading economist and former finance professor. Xia explained that Chinese quant funds have developed trading strategies tailored specifically for the mainland market, which foreign competitors cannot replicate.

These strategies are based on China's unique valuation logic for state-owned enterprises, which creates pricing dynamics that traditional foreign models fail to capture. Beijing has recently implemented stricter regulations on trading speed, including the suspension of initial public offerings and policy-driven trading halts, which have been designed to level the playing field for all participants.

However, Xia noted that these measures have not been successful in eliminating the speed advantage that Chinese quant funds possess. Chinese quant firms have responded to the new rules by redirecting capital towards hosting space closest to exchange servers, in an "arms race" for low latency. Monthly rents for financial server racks in nearby facilities have increased by 40-50%, according to the Shanghai Securities News.

To address the latency issue entirely, Xia suggested implementing "frequent batch auctions," in which orders clearing within a set time window do so at a single price. The regulatory crackdown comes at a challenging time for the quant sector, as mainland quant hedge funds have faced significant losses since early July, with High-Flyer Quant reportedly losing around 20% across several products.

Xia argued that quant trading is often blamed for market swings, even though it accounts for only a small percentage of turnover. He suggested that as speed advantages diminish under tighter rules, mid- and low-frequency quantitative strategies built on China-specific research will likely become more prevalent, eventually displacing traditional discretionary fund managers.

While administrative oversight may have its limits, Xia believes that market competition will naturally eliminate underperforming funds. He emphasized the importance of focusing on trading strategies rather than individual stocks and warned against adopting a "T+0" same-day trading rule, arguing that it would likely trigger overtrading and deepen retail losses.