China Intensifies Clampdown on High-Frequency Trading to Stabilize Markets

Chinese financial authorities have significantly ramped up their regulatory oversight of high-frequency trading (HFT) and algorithmic trading, a move designed to temper speculative market activity and foster greater stability. The intensified clampdown, spearheaded by the China Securities Regulatory Commission (CSRC), has introduced a series of stringent measures impacting both domestic and international trading firms.

New Regulatory Directives

A core component of the new regulatory push involves the mandated removal of client servers from exchange data centers, effectively eliminating the 'co-location' advantage previously utilized by HFT firms. This directive, which affects exchanges such as the Shanghai Futures Exchange and Guangzhou Futures Exchange, requires brokers to relocate high-speed client equipment. For instance, the Shanghai Futures Exchange has set deadlines for the removal of high-speed client equipment by the end of February, with other clients given until April 30.

Further measures include the planned imposition of an additional two milliseconds of latency for connections routed through third-party data centers. This artificial delay is intended to further dilute the speed advantages enjoyed by high-frequency traders. Regulators are also introducing differentiated fee structures, including 'traffic fees' and 'cancellation fees,' based on indicators like the number of submissions and cancellation rates, to increase the cost of rapid trading and reduce overall speed.

Rationale and Scope of the Clampdown

The CSRC's actions are part of a broader strategy to 'level the playing field' and reinforce market stability, addressing concerns that HFT practices contribute to short-term price distortions and excessive speculation. Officials have expressed unease over the execution advantages HFT firms possess, which can be beyond the reach of most retail investors. The regulatory body has also tightened margin financing rules to mitigate risks in stock trading.

High-frequency trading is generally defined in China as activity involving more than 300 orders or cancellations per second through a single account, or over 20,000 order requests in a day. Data from the CSRC indicated that the number of high-frequency trading accounts declined by approximately 20% in 2024, reaching about 1,600 by June 30 of that year.

Market Impact and Affected Firms

The intensified clampdown has already exerted pressure on Chinese stock indices. The Shanghai Composite Index, Shenzhen Component Index, and CSI 500 Index experienced declines following the regulatory announcements. Metal prices, including copper, zinc, and aluminum, also retreated in both Shanghai and London. The measures are expected to significantly impact both domestic quantitative funds and major global HFT firms operating in China, including entities such as Citadel Securities, Jane Street Group, and Jump Trading, whose access to exchange-linked servers is being curtailed.