2024.07.19 XIE, Qing (Natasha)、ZHANG, Chi (Austin)、LUO, Danchen
On July 10, 2024, the China Securities Regulatory Commission (CSRC) published a Q&A session on its official website regarding regulatory actions on program trading. In the session, the CSRC summarized the regulatory work that happened in the first half of 2024 and signaled to the market the regulatory focus for the next six months.
I. A Summary of the Regulatory Work
In the first half of 2024, the CSRC and the relevant securities exchanges issued a series of program trading rules and regulations and undertook a number of regulatory actions. The Administrative Provisions on Program Trading in the Securities Market (Trial) (the “Administrative Provisions”) was issued on May 15 and will take effect on October 8. The CSRC guided three securities exchanges to formulate the Detailed Implementation Rules for the Management of Program Trading (Draft) and released the same on June 7 for public comments. The CSRC organized the securities exchanges to undertake more research on how to improve the major monitoring indicators for (i) abnormal instantaneous order placements, (ii) frequent instantaneous order cancellations, (iii) frequent lifting or suppressing, and (iv) large trades in a short period of time. Since April, these indicators have been implemented on a trial basis and program trading investors that frequently triggered such indicators were reminded to rectify their behavior. The CSRC also stated that they are currently exploring and consulting with the relevant Hong Kong authority and exchange regarding program trading reporting rules for Northbound Trading under Stock Connect, based on the principle of fair treatment for both domestic and foreign investors.
II. A Multi-pronged Approach to Strengthening Regulation
A multi-pronged approach was adopted by the CSRC to strengthen the program trading regulation by (i) establishing an administrative regulation at the CSRC level, (ii) formulating securities exchanges’ implementation rules, (iii) improving securities exchanges’ monitoring indicators, (iv) enhancing securities exchange’s self-disciplinary regulations, and (v) aligning the regulatory requirements for domestic and foreign investors.
III. Regulatory Actions Are Beginning to Show Results
In the Q&A session, the CSRC said that program trading has remained stable with a slight decline since the beginning of 2024. There have also been positive changes in trading behavior. By the end of June, there were over 1600 high-frequency trading accounts, which was a more than 20% decrease, and trading behavior that had triggered abnormal trading monitoring thresholds had decreased by almost 60% in the past three months. This indicates that the CSRC's efforts to regulate program trading are starting to have results.
IV. The Next Regulatory Focus Areas
The CSRC pointed out their next five regulatory focus areas:
Firstly, they will guide securities exchanges to release the Detailed Implementation Rules for the Management of Program Trading as soon as possible, improve the current program trading reporting regimes, and strengthen the verification of reported information and on-site inspections. This means that such implementation rules are expected to be issued very soon.
The securities exchanges will also further evaluate and improve the existing program trading reporting regimes and focus on the verification of reported information and on-site inspections.
Secondly, they will guide securities exchanges to release and implement abnormal program trading monitoring thresholds, set monitoring “red lines” for program trading, and facilitate the reduction in the frequency and speed of program trading, particularly high-frequency trading. We anticipate that securities exchanges may introduce detailed abnormal program trading monitoring rules soon.
Thirdly, they will strengthen communication and coordination with the relevant Hong Kong authority and exchange, so as to expedite the formulation and implementation of program trading reporting guidance for Northbound Trade under Stock Connect, where the same regulatory requirements will apply to northbound program trading investors. We expect that this will also make progress within the year.
Fourthly, they will specify the different fee standards for high-frequency trading. Based on indicators such as the number of order placements and the order cancellation frequency, the standards for additional fees for high-frequency trading, such as messaging fees and order cancellation fees, will be specified with a view to reducing the frequency and speed of high-frequency trading by increasing the cost of these activities.
Fifthly, they aim to strengthen the monitoring and supervision of trading behavior and crack down on illegal activity.
SAC Template
Article 12 of the Administrative Provisions stipulates that the Securities Association of China (SAC) should formulate and update a template agreement on program trading for securities companies in a timely manner. On July 9, 2024, the SAC solicited for securities companies’ comments on a draft Program Trading Entrustment Agreement (Template) (“SAC Template”). Though the SAC stated to the media that the SAC Template is a non-mandatory one, meaning that securities companies can use their own tailored agreements only in reference to the SAC Template, we expect that securities companies will update their own template agreements by following the SAC Template to the extent possible, and accordingly both the securities companies and program trading clients shall sign the updated agreement or supplementary agreement to agree on their rights, obligations and liabilities regarding program trading.
