China Restricts High-Frequency Traders’ Access to Exchange Data
China’s securities regulator has instructed brokers to remove client-dedicated servers from data centers located at local exchanges, according to sources familiar with the matter. This move is designed to limit the advantages enjoyed by high-frequency traders, often referred to as “flash boys,” and promote fairer trading conditions for all investors.
High-frequency traders in China have historically positioned servers within exchange-run data centers to minimize latency and gain a speed advantage in executing trades. This physical proximity allows them to shave off crucial milliseconds or microseconds, potentially leading to significant profits.
The action by the China Securities Regulatory Commission (CSRC) comes amid growing concerns about market speculation and the protection of smaller investors, particularly following a period of rapid growth in the domestic market. The CSRC has recently tightened margin requirements and vowed to crack down on market manipulation.
“Previously, you were in the house. Now, you're being driven out. It will likely trigger an industry shake-up,” one source with direct knowledge of the development told Reuters, indicating that some firms may lose a key competitive edge.
The directive affects both Chinese and foreign high-frequency traders, including prominent players like Citadel Securities and Jane Street Group. It applies to all major exchanges overseen by the CSRC, encompassing commodities futures and stock exchanges in Shanghai, Dalian, Zhengzhou, and Guangzhou.
According to Shane Oliver, chief economist at AMP, “They do want to keep the markets focused on investment, as opposed to speculation. That's what it is all about - trying to avoid excessive speculative activity, which they fear could be destabilising.” He added that Chinese authorities likely prefer investors focused on long-term value, like Warren Buffett, over high-frequency trading.
The high-frequency trading market in China is estimated to be a significant segment of the broader “quant fund” industry, valued at 1.55 trillion yuan ($222.60 billion) in 2023 by Citic Securities. The market’s relative immaturity and inefficiencies have attracted foreign investment.
This move follows earlier tightening of rules on program trading and high-frequency trading after a computer-driven market crash in early 2024, dubbed the “quant quake.” China also implemented rules regulating futures program trading last October.
The CSRC, Citadel Securities and Jane Street did not respond to requests for comment. The sources quoted in this report were not authorized to speak to the media.