China scrutinizes quant strategies as market weakness stokes public anger. With China’s stock market struggling to rebound, regulators are investigating some hedge funds and brokerages’ quantitative trading tactics amid a growing outcry against a sector that profits from share price dips and volatility, sources said.
Two sources said the China Securities Regulatory Commission (CSRC) has questioned several major brokers about their quant clients’ short-selling and trading strategies over the past few weeks. Quant clients trade rapidly using derivatives and data-driven computer models.
Another source said the Shanghai and Shenzhen stock exchanges, under CSRC instruction, have asked prominent quant funds about their money-making tactics.
“They want to know the trading strategy’s logic, the source of the profit, when you hold net long or net short positions, and why you place buy and sell orders,” the person said.
The sources declined to be named because they cannot speak to the media. The CSRC and bourses declined to comment.
It’s unclear if Winton and Two Sigma, global quant fund companies, are being investigated in China.
The current regulatory examination comes after a series of market-friendly measures, including a stamp duty decrease, failed to boost a faltering market (.CSI300) down 5% year-to-date.
The weakening has prompted social media blame, fund managers, and retail investors’ criticism of quant funds and short sellers.
The CSRC pledged to boost program trading monitoring earlier this month, and some fear further probes will tighten hedge fund short-selling and funding laws.
The regulatory review is precedented. Beijing nearly closed the index futures market after China’s 2015 crisis, blaming short sellers.
In 2021, Chinese quantity funds grew to 1.08 trillion yuan ($147.94 billion), nearly double the previous year, according to research by Huatai Securities. Top Chinese quant funds include High-Flyer Quant Investment, Yanfu Investments LLC, and Shanghai Minghong Investment Management Co.
One brokerage source suggested regulators may reduce market volatility by understanding quant techniques.
He warned that quant funds’ short-selling could be caught in the crossfire.
Active trading and commission contributions make Chinese brokers more likely to lend assets to quants for short selling. Water Wisdom Asset Management fund manager Yuan Yuwei said it’s unfair to other market players who have less securities lending access.
Three individuals said the regulatory inquiry is early and unresolved.
LEVERAGED BETS
Sources say regulators want DMA data. Chinese hedge funds can borrow from brokerages to leverage bets through DMA. $1 borrowing takes only 25 cents in deposits.
“DMA raises eyebrows because it uses high leverage and lets quant funds make money,” said a brokerage source.
Another brokerage source claimed the CSRC quizzed them about their quant clients and stock market impact.
Vice general manager of Asset Manager Tongheng Investment Yang Tingwu advocates tighter quant fund restrictions, claiming that many Chinese quants profit from momentum signals rather than fundamentals on badly run companies.
He claimed the quant technique is neutral, but “in China, it’s being used to provide liquidity to the bad guys,” or poorly governed listed enterprises.
