China kicks high-speed traders out of exchange data centers

China's securities regulator has asked brokers to remove client-dedicated servers from data centers in local exchanges, a move that will deprive rapid-trading "flash boys" of an edge against other investors, people with knowledge of the matter said.

High-frequency traders in China have long used servers situated at data centers run by futures and stock exchanges and owned by brokers to execute trades as the physical adjacency shaves off milliseconds or even microseconds.

The tightening measure comes as the Chinese securities regulator steps up efforts to discourage market speculation and protect small investors, amid a runaway rally in the domestic market over the past year, which has triggered concerns about another boom-and-bust cycle. 

The latest move on access to exchange data centers could send ripples across China's market of high-frequency trading, which has lured foreign players including Citadel Securities and Jane Street Group.

The China Securities Regulatory Commission (CSRC) has asked brokerages in recent weeks to remove such servers, affecting both Chinese and foreign high-frequency traders, said one of the people who received the guidance.

The requirements are aimed at creating a level playing field, said another person with direct knowledge of the development. 

"Previously, you were in the house. Now, you're being driven out. It will likely trigger an industry shake-up" as some players will lose a key advantage, the person said.

The sources did not want to be named as they are not authorised to talk to media.

Bloomberg first reported on Friday, citing people familiar with the matter, that commodities futures exchanges in Shanghai and Guangzhou are among those that have ordered local brokers to shift servers for their clients out of data centers run by the bourses.

The sources told Reuters the guidance applies to all major exchanges overseen by the CSRC, including commodities futures exchanges and stock exchanges.

China’s major futures exchanges are based in Shanghai, Dalian, Zhengzhou and Guangzhou.

Shanghai, Dalian, Zhengzhou and Guangzhou exchanges did not immediately reply to Reuters requests for comment.

'Fair trading conditions'

China’s benchmark Shanghai Composite Index scaled decade-highs last week as turnover and leverage trades hit records. Some companies, especially those from the AI and semiconductor sectors, jumped as much as 700% in their local market debuts in recent weeks.

Against the backdrop of the broader market euphoria, the Chinese markets watchdog tightened margin requirements last week to cool a red-hot stock market. Also, on Friday, the CSRC vowed to maintain market fairness and crack down on excessive speculation and market manipulation.

“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,” said Shane Oliver, chief economist at AMP.

“I think the Chinese authorities are just worried about speculation associated with high frequency trading. They'd probably prefer more traders like Warren Buffett focused on value, as opposed to high frequency trading, which they would see as speculative.”

There’s no official data on the size of China’s high-frequency trading market, which is a segment of the computer-driven “quant fund” industry – estimated to be worth 1.55 trillion yuan ($222.60 billion) in 2023 by Citic Securities.

In addition to size, the market’s relative inefficiency and immaturity compared with western counterparts make it appealing to foreign players.

Flash Boys is a nickname for investors who focus on extremely short-term price moves - sometimes within a second - popularised in the title of American journalist Michael Lewis’ 2014 book, which details the rise and tactics of high-frequency trading in US markets.

The latest regulatory move on servers could also weigh on Chinese futures brokerages as they have a relatively big number of high-frequency-trading clients, one of the people said.

China has been tightening rules on programme trading and high-frequency trading since early 2024, when computer-driven trades triggered a crash, dubbed China's "quant quake".

Last October, China rolled out rules regulating futures program trading.

An exchange official, who declined to be identified, said that regulators are moving to ensure trading conditions are fair for every investor.

China is not alone in tightening screws on high-frequency trading.

The European Union in 2018 implemented rules that tighten scrutiny over algorithmic trading.

Last year, Indian regulators barred US high-frequency-trading firm Jane Street from the local market, saying an investigation found it manipulated stock indices through positions taken in derivatives.

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