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CSRC to crack down on automated trading

By NexChange
Capital Markets

Well, it appears all those rumors were really true.

After slamming the volatility it helped create, the CSRC told Xinhua (Chinese) over the weekend that it will indeed tighten its grip on automated trading and curb excess speculation in stock index futures. And not only that, they also plan to add a circuit breaker mechanism to temporarily shut down trading when things start getting hairy.

How it defines “excess” and how it plans to regulate a construct of ones and zeroes is currently unclear however, though I did find this earlier tweet about it particularly delightful:

CHINA MAY ASK ALGORITHMIC TRADERS TO REPORT IN ADVANCE: CAIXIN - have no idea how this works in principle
— Chris Weston (@ChrisWeston_IG) August 31, 2015

Joking aside, this is the nth time China is making a mistake in regards to their stock market, and just goes to show how badly they needed the “sea turtles” – the best and the brightest of the nation’s returnees – who ended up either unceremoniously ousted by the CSRC or forced to return to the private sector.

With them gone, the watchdog has done nothing but omnishambolic policies and witchhunts that have sullied its own credibility, from allowing margin lending to grow unhindered to blaming “hostile foreigners” for the market’s crash.

In tightening its grip on automated trading, not only has it made itself a laughing stock, it has also built more walls against the once-rushing tide of investments coming in from the outside world. Algorithmic trading adds a massive amount of liquidity in the market, a huge plus for foreign investors seeking to invest, and Peking University professor Christopher Balding also seems to have found another benefit of their presence:
“…given their importance in the market whether it is stocks or currencies, there is evidence that algorithmic trading has played a significant role in stabilizing the markets.  After falling relatively sharply beginning on August 21 for a number of days, major markets outside of China began sharp recoveries that have returned them largely to the point they were on August 21.  While we cannot say with certainty that algorithms are responsible, the rapid rebound from a fear induced sell off would seem to seem to match with how many of those types of programs especially when many of the economic fundamentals of the major markets presented here are better than China.”
And they couldn’t have done it at a worse time; liquidity in the Shanghai Hong Kong cross-border connect is already drying up, CDS’ on China are comparing it to MERS-plagued South Korea, and growth is starting to go the way of the dodo.

It’s almost as if someone’s doing this just to get Premier Li out of office. But maybe that’s just me with my tinfoil hat on.
Photo: Edgeworks Limited

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