Finance & Economics

China Reportedly Aims to Shrink Scale of Quantitative Trading Strategy

The media, citing anonymous insiders, report that local regulators in China are currently taking measures aimed at gradually reducing the scale of implementation of the popular quantitative trading strategy.

China Reportedly Aims to Shrink Scale of Quantitative Trading Strategy

The actions of the authorities of the mentioned Asian country are explained by the fact that the specified strategy has become one of the factors that formed a kind of base for shocks in the local stock market.

Some quantitative funds that manage direct market access (DMA) products for external customers have been ordered by Chinese regulators to stop accepting new inflows and begin phasing out their existing solutions. Such funds usually use swap contracts and often have a high degree of leverage. This is reported by the media, referring to insiders who used the right of anonymity, noting that they do not have the authority to make public statements on the concerning issue. It is worth noting that as part of the implementation of the intentions of Chinese regulators, the most correct approach would be applying the principle of gradualism, which will avoid sharp selloffs.

The authorities of the Asian country are restricting the popular trade, which enabled quant funds with the opportunity to increase returns in 2023. This decision was made due to accusations of exacerbating sell-off in the stock market this year. According to the hedge fund Shanghai Banxia Investment Management Center, as of the beginning of 2024, the financial volume of the DMA products amounted to 200 billion yuan ($27.8 billion).

The media, citing insiders, report that the guidance to quantitative funds has been given over the past few days and adjustments may be made to it. The Chinese Securities Regulatory Commission did not respond to a request from journalists on this issue.

Regulators did not need funds to trim the positions of existing products, but the corresponding actions caused concerns about further sales. The CSI 2000 Index, which is an indicator of small capitalizations and preferred by quants, showed a drop of 6.8%.

Chen Zunde, fund manager of Guangdong Fund Investment Co. Ltd., says that the decision of regulators reflects the ongoing desire to drive to deleverage in the market and is a factor influencing sentiment across the board. The expert warns that this shrink in the volume of borrowed funds may provoke a prolonged drop and cause a repeat of the January downturn.

Companies that use DMA for proprietary trades can continue to follow a quantitative strategy, although their leverage will be limited to a one-time investment amount. This was reported by insiders. Beijing first began restricting the distribution of DMA products to certain funds around November 2023.

The DMA model allows market-neutral stock products that balance bullish and bearish positions to borrow up to 300% of their investments from brokerage companies. In February, the Chinese authorities generally managed to rein in quant funds, which had been engaged in computer-driven trading to outperform the market for most of the past three years. The relevant group of funds found itself in the zone of close attention after accusations of aggravating the market downturn. Concerning some DMA products, a measure of influence was applied in the form of a ban on sale.

DMA services in companies that deal in securities, allowing clients to conduct transactions directly through the trading desks of brokerage companies, have become something like a popular approach for quants to add leverage to market-neutral strategies. The demand for relevant services has increased dramatically after regulators tightened the rules at the end of 2021, effectively banning an earlier type of favored swap. It is worth noting that initially the model with additional levers to market-neutral strategies was used mainly for its own quant proprietary trades. In August, analysts at Citic Futures Co. published a report according to which the number of managers selling DMA products to customers to increase assets is growing.

The Chinese government’s drastic measures have propped up stock prices. This measure has proved effective, but so far its ability to have a long-term character remains a question. The benchmark CSI 300 Index has been showing growth since February 2, which has already amounted to almost 9%.

As we have reported earlier, Standard Chartered CEO Says About China’s Biggest Problem.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.