An advertising board (L) showing a Chinese stone lion is pictured near an entrance to the headquarters (R) of China Securities Regulatory Commission (CSRC), in Beijing, China, in this September 7, 2015 file photo. REUTERS/Jason Lee/Files
November 12, 2015
By Michelle Price and Saikat Chatterjee
HONG KONG (Reuters) – Draft rules to curb high-speed trading blamed for China’s summer stock market crash could kill off billions of dollars of investment into China, global banks and investors have told Chinese regulators in a letter.
Industry participants who signed off on the letter said it warned Chinese regulators that the proposals would inadvertently sabotage major investment channels worth around $160 billion, including the Stock Connect scheme, one year old next week, which links the Hong Kong and Shanghai bourses.
The lobbying efforts reflect growing fears that Beijing is responding to the summer rout by halting or even reversing reforms to allow greater access to its capital markets.
Plans to expand the Stock Connect scheme to the Shenzhen exchange and to include new listed products stalled after mainland bourses tumbled 45 percent between June and August and Beijing intervened through a range of measures to stop the plunge.
In a letter sent on Sunday by the Asia Securities Industry & Financial Markets Association (ASIFMA) to the China Securities Regulatory Commission (CSRC), foreign investors and brokers said the rules to stop “program trading” domestically would mean foreign firms could not send electronic trades from Hong Kong to brokers onshore.
“The proposed restriction on investors using algorithmic trading to connect to Chinese brokers onshore is huge – if you can’t use automated systems, you can’t trade on Stock Connect,” said one person involved in drafting the letter.
A spokeswoman for ASIFMA, which represents the world’s biggest financial institutions including Goldman Sachs, Morgan Stanley and Credit Suisse, declined to comment.
The CSRC last month launched a consultation on program trading rules as part of a broader crackdown on a range of automated trading practices blamed for the summer rout. The consultation closed on Sunday.
Program trading involves electronically buying or selling baskets of stocks on exchanges. However, the CSRC proposal is phrased so broadly it appears to cover all types of electronic trades including orders originating offshore, said Yang Tiecheng, a partner at law firm Clifford Chance in Beijing, also a member of ASIFMA.
The rules propose banning onshore brokers from receiving electronic trades from offshore computers, the current model for foreigners trading via the cross-border investment schemes. It also requires foreign firms to surrender the computer code that runs their trading programs.
“As a member of the electronic trading community for a long time, I can assure you that most global brokers will not be comfortable providing their source code to anyone,” said Joel Hurewitz, managing director at international brokerage Instinet in Hong Kong.
Compared with the United States and Europe, automated trading is in its infancy in China, and the CSRC, which has suffered a flight of talent over the past two years, has relatively little experience supervising such systems.
Market participants and lawyers said they thought the proposal was clumsily drafted and not intended to damage Stock Connect and other schemes for foreign investors, and hoped the regulator would be able to amend the proposals.
The CSRC did not respond to request for comment, but has said the rules aim to reduce risks in the market.
A spokesman for Hong Kong Exchanges & Clearing <0388.HK>, which has spent more than two years building Stock Connect, said it was “relaying market participant comments to the mainland authorities for consideration”.
The Hong Kong Investment Funds Association (HKIFA), which represents global asset managers, also wrote to the CSRC over the weekend urging the body to provide further clarity on the scope of the rules, said Sally Wong, the group’s CEO.
“More importantly, what we are proposing is to have closer dialogue with the regulator regarding how automated trading is being deployed, as well as the what and why.”
(Reporting by Michelle Price and Saikat Chatterjee; Editing by Will Waterman)