Growth of low latency and algorithmic trading is continuing in the Chinese market despite regulatory limits on high-frequency trading (HFT) on the country's futures exchanges, according to Alec Chan, sales director, Northern Asia, at trading technology provider RTS Realtime Systems Group.
“The international players are careful in entering the Chinese market because of these regulations. They cannot do traditional HFT in China and fees are considered rather prohibitive. So certainly the regulator has done its job in curbing speculation by preventing HFT. But there are also a large number of algo traders that are very interested in entering China,” he notes. “In this market, you have to distinguish between HFT, low latency trading and algo trading. Low latency and algo trading go hand-in-hand and are the focus in China.”
The Zhengzhou Commodity Exchange, Shanghai Futures Exchange and Dalian Commodity Exchange separately issued rules in November 2010 to curb “abnormal” trading as commodity prices hit record highs. The exchanges will alert the China Securities Regulatory Commission if market participants are found to be trading between their own accounts or frequently placing and cancelling orders. Market participants are also disallowed from using related accounts to hold positions that exceed their individual limits.
Chan reports that RTS's customers, particularly those in the US, are increasingly interested in trading commodity futures in China. “From speaking to a lot of our partners in China, they are telling us their customers are starting to look for algo solutions both in the equities and the futures space,” he says. “The players in China are now very knowledgeable of international trends. They are aware of algo trading from what they see happening in other markets, and they are extremely aware of the dangers, having witnesses the US flash crash last year. International players are starting to establish themselves in China and there is an accompanying inflow of talent and knowledge.”
In China, a small number of platforms exist that makes use of an application programming interface to enable trading companies to interface their own programs with the exchanges. In January 2011, Guosen Securities, a leading Chinese securities broker, signed an agreement to use the high-performance kdb+ database of solutions provider Kx Systems that forms part of an order matching system developed by Guosen Securities to cater for large institutional clients. However, powerful off-the-shelf algorithmic trading products for the equity and futures markets that are common in other markets are not yet available in China.
RTS is a global provider of ultra-low latency trading, connectivity and co-location hosting solutions. The firm organised a high-level panel discussion on 19 July in Shanghai on ”A Foray into the Chinese Derivatives Markets' that included participation by Nick Ronalds, executive director of trade body FIA Asia, and Lian Hao, president of the Chinese Derivatives Association.
But while competition amongst peers and also from alternative trading venues has compelled equities and futures exchanges worldwide to attract high-frequency traders, China's two stock exchanges (Shanghai and Shenzhen) and four futures exchanges – Dalian Commodity Exchange, Shanghai Futures Exchange, Zhengzhou Commodity Exchange and the China Financial Futures Exchange – are certainly not about to jump onto that particular bandwagon.
One prerequisite for low latency trading to grow in any market is the availability of co-location offered by the exchange. The Shanghai Futures Information Technology (SFIT), a software company set up by the Shanghai Futures Exchange, provides a data centre where participants can co-locate their servers alongside the SFIT gateway. Most vendors including RTS route to the SFIT gateway that provides a common access point to the four futures exchanges.
Chan notes, “On the futures side, you can only cancel orders up to 500 times per contract per day. There is no such concept of order modification. If you want to change an order, you have to cancel it and put in a new one. That basically kills HFT in China for futures, but there's still a lot of value in doing algos. People simply have to modify their algos so that they don't buy and sell a thousand times a minute, but instead they would wait for the right opportunity to enter and exit the market.”
Author: Jill Wong