Avast, Computers! PRC vs. Algorithmic Trading

♠ Posted by Emmanuel in , at 10/13/2015 01:30:00 AM
The rather spectacular fall of the Chinese stock markets midyear--after the PRC acted as a cheerleader in driving it up, it must be said--prompted an official witch hunt for scapegoats. Western brokerages got their share of the heat, but the focus has arguably turned from who to what caused the plunge in stock prices. Cue today's stock market pantomime villains [mwa-ha-ha!]: the ever-so-vile algorithmic traders:
Chinese regulators are planning to increase their oversight of algorithmic traders, extending a campaign to stabilize the equity market that some analysts say has resulted in shrinking volumes and an exodus by foreign investors.

Under draft rules released by China’s securities regulator on Friday, traders who use automated orders to buy and sell stocks would need to report certain information and wait for a review before they’re allowed to execute their strategies. Orders shouldn’t originate from offshore computers or domestic systems that are remotely controlled from overseas, according to the China Securities Regulatory Commission’s proposal.

The plan is China’s latest effort to crack down on strategies blamed by authorities for exacerbating a $5 trillion stock-market rout. Volumes in the country’s equity-index futures collapsed last month amid government curbs on trading, while turnover in cash equities dropped to a one-year low on Sept. 30. The CSRC’s proposal on algorithmic trades would further weigh on volume, said Wen Zhimin, the Shenzhen-based chief strategy officer at Dacheng Fund Management Co. "Algo traders often have a very small time window to execute their strategies," said Wen, whose firm’s algorithmic unit has been trading for more than three years. "They can’t do anything if approvals take too long."
As a small, private investor in equities among other things, I am not necessarily averse to the idea that high-frequency trading driven by computers has increased rather than decreased volatility the way it was supposed to. Faced with the electronic herd bum-rushing markets in the blink of an eye, humans are prone to getting run over.

That said, I do believe that the Chinese government did provide speculators with a very tempting target to aim at by driving the prices of stocks way above valuations warranted by fundamentals. They put a very large "KICK ME" sticker on Chinese bourses, and if it not the algorithms, then someone would have shorted overvalued markets anyhow.