China to tighten leash on futures quant trading to contain risks amid stock slump

China's futures exchanges plan to tighten oversight of high-frequency, algorithm-based trading in an effort to mitigate risks amid a decline in the nation's stock markets. Programme trading, also known as quantitative trading, will be subject to more stringent reporting and inspection protocols. Participants who fail to comply with these rules, or who do not implement adequate internal controls and risk management systems, may face severe penalties, including a permanent ban from the market.

The exchanges are currently seeking public feedback on proposed amendments to the rules and punishments, which will remain open until Monday. This crackdown follows a meeting between the China Securities Regulatory Commission and market participants, suggesting possible stabilisation measures if stock prices continue to fall. China's capital markets have been under scrutiny, as they play a crucial role in Beijing's technological self-reliance initiative.

While US equities have reached record highs, Chinese stocks have struggled, with the CSI 300 Index falling 1.2% on Tuesday and the Star Market 50 gauge declining 2.2%. Some investors have attributed the underperformance to domestic demand issues and Beijing's reluctance to implement more aggressive stimulus measures. High-frequency programme trading has been cited as a contributing factor to the persistent underperformance of Chinese stocks.

In response to retail investor complaints about an unfair advantage for those who use such trading, the Shanghai and Shenzhen exchanges implemented measures in 2024 to curb its usage. According to Xu Chi, an analyst at Zhongtai Securities, stabilising the market is essential for both short-term volatility management and long-term funding opportunities, company financing, and industry transitions.

Participants found to violate the rules could face warnings, reprimands, restrictions on opening new positions for up to 12 months, expulsion from relevant memberships, or fines of up to 500,000 yuan (US$74,684). China Financial Futures Exchange is the only platform in mainland China offering trading of financial derivatives, providing futures contracts and options on the CSI 300 Index and government bond contracts across various maturities.

The Shanghai Futures Exchange primarily focuses on commodity trading, with 25 items ranging from copper and aluminium to crude oil and rubber.