China on Friday issued draft regulations governing automated stock trading on three exchanges, including the adoption of a net daily purchase quota for some securities, in an effort to prevent a repeat of the turmoil that roiled markets this summer.
China's securities regulator, the Shanghai and Shenzhen stock exchanges and the Shanghai Futures Exchange all issued statements saying they would closely scrutinize high-frequency traders, defined as those who make and subsequently cancel a market order within a second more than three times a day, among other criteria. Shaken by wild swings that wiped out 40 percent of the stock market's value in weeks, the China Securities Regulatory Commission (CSRC) pledged in July to step up scrutiny of automated trading along with other "malicious" market tactics.
Stocks subject to high-frequency trading could be halted, the CSRC said in the draft regulations issued on Friday. High-frequency traders must also disclose their trading programmes to an audit and pay a small fee per transaction if they do not complete a certain percentage of market orders. Although the CSRC moves mirror heightened scrutiny of high-frequency trading in financial centres like New York and London, Beijing's muscular intervention during this summer's volatility has raised questions internationally about China's commitment to free market reforms.
Aside from cracking down on automated trading, the CSRC has also targeted short-selling and trading with fraudulent accounts. Sources told Reuters last month that regulators are now drafting similar regulations for the country's commodities exchanges, which have become a haven for flash traders who have moved on from the stock markets. The regulator said it will seek public reaction to the plans before adopting the new regulations. It also asked brokerages and funds to review automated trading operations so they are in line with the regulator's existing risk management standards.
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