In response to a growing backlash against a sector that can profit from stock price drops and volatility, regulators have begun looking into certain hedge funds as well as brokerages' quantitative trading tactics as the Chinese stock market tries to rebound, sources said.
According to two people with firsthand knowledge of the investigation, the Chinese Securities Regulatory Commission (CSRC) has been in touch with a number of significant brokers in recent weeks regarding the short-selling practices and trading tactics of their quant clients, or funds that trade quickly using derivatives and data-driven computational models.
According to a different source, the CSRC has directed the Shanghai and Shenzhen stock exchanges to contact large quant funds for information on their revenue-generating methods.
The source said that they wish to know the rationale behind the trading process, the source of the earnings, the circumstances to maintain net short or net long positions, and the logic underlying buy and sell orders.
Due to the fact that they are not authorized to speak to the media, the sources refused to be named. Inquiries for comment were not answered by the CSRC or the exchanges.
It's unclear whether the overseas players are being investigated, despite the fact that international quant fund institutions like Winton and Two Sigma are operating in China.
A number of market-friendly policies, including a reduction in stamp duty, failed to ignite a long-lasting rally in the ailing market, which is down about 5% year to date. This is why the latest oversight by regulators has been introduced.
The weakness has led to social media finger-pointing, and these quant funds and short sellers have come under fire from fund managers and regular investors.
Some worry that new investigations could result in stricter limits on short-selling and particular financing activities from hedge funds. The CSRC had pledged to strengthen vigilance in programme trading earlier this month.
The regulatory review has been done before. Beijing nearly shut down the index futures market in 2015 when the Chinese stock market crashed and attributed the turmoil to shortsellers.
Probe
At the close of 2021, the amount of quant funds in China hit 1.08 trillion yuan, or $147.94 billion, almost doubling from the previous year, according to research put together by organizations like Huatai Securities.
One of the sources stated that once regulators have a greater knowledge of different quant strategies, they may decide to limit those that increase market volatility.
He added that quant fund short-selling operations might also be affected.
Due to their frequent trading and commission input, brokers in China tend to be more inclined to lend stocks to quants for short selling. According to Yuan Yuwei, a fund manager of Water Wisdom Asset Management, it's not fair to other market participants who scarcely have opportunities for securities lending.
According to three sources, the regulatory investigation is still in the early stages and no conclusions have been reached.
Leveraged bets
Regulatory authorities have reportedly requested information about Direct Market Access (DMA). Through DMA, Chinese hedge funds are able to obtain credit from brokerages to fund leveraged wagers. Only a minimum deposit of 25 cents is needed to borrow $1.
DMA easily raises eyebrows because it uses a lot of leverage and gives quant funds the opportunity to profit greatly, according to a brokerage source.
According to a different brokerage source, the CSRC requested that they provide more information on the scale of their quant clientele and whether or not quant trading has an impact on the current stock market.
Yang Tingwu, deputy general manager of asset manager Tongheng Investment, favors more regulations for quant funds, noting that many Chinese quants make profitable bets on poorly run companies on the basis of momentum signals instead of fundamentals.
Although quantitative strategy is a neutral instrument, he claimed that in China, it's utilized to bring money to the bad guys, alluding to listed companies with subpar governance.