Changes are afoot in Chinese exchange colocation service regulations, with sources have confirmed to Global Trading that the Shanghai and Shenzhen exchanges are meeting with clients and mainland brokers to discuss incoming rule amendments.
Rumours of new regulations were reported in Chinese publication National Business Daily last week. The article noted that order submission delays could be extended, and that securities firms may have to remove all client-dedicated equipment located inside exchanges within three months.
One source familiar with the issue highlighted the scale of such an exercise, warning that it would be a significant operation for algo firms to complete in the three-month timeframe.
Colocation services allow firms to place their servers close to an exchange’s matching engines, thereby reducing latency. Such services are favoured by high-frequency traders (HFTs), as they allow them to place orders faster than their competitors.
The China Securities Regulatory Commission’s (CSRC) current securities programme trading rules, updated over the summer, allowed eligible brokers to offer direct market access (DMA) to external clients. Simmons & Simmons also highlighted that DMA may later be allowed in futures securities trading – where it is currently only permitted for international participants acquiring market data.
Order submission delays may be similar to those seen with IEX’s ‘Speed Bump’, which provides a buffer before orders reach the exchange’s matching engine. IEX introduced this mechanism in a bid to create a fairer trading environment.
HFTs are active in the Chinese stock markets, with Citadel Securities applying to set up a securities status on the mainland earlier this year. Algo trading is nevertheless tightly regulated.
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No official statement has been made by either mainland exchange or the CSRC. Regulation of the Shanghai and Shenzhen exchanges was described as “difficult” by a market participant earlier this year, who explained to Global Trading that guidance is not always clear.
