M88 Game OM88 Gamer Shoe Drops – Stock Program Trading Reporting Rules Are Released

On September 1, 2023, M88 Game China Securities Regulatory Commission (“CSRC”) announced program trading reporting rules for stock market¹. This followed M88 Game release on M88 Game same day of circulars by each of M88 Game three stock exchanges, i.e., M88 Game SSE, SZSE, BSE. According to M88 Game CSRC’s press release, M88 Game program trading reporting mechanisms and corresponding regulatory arrangements aim to facilitate M88 Game transparency of existing program trading activity and manage expectations regarding M88 Game supervision and regulation of program trading. This is a timely response to market concerns and certain doubts in M88 Game accountability of domestic quantitative traders to recent market volatility. M88 Gamese reporting mechanisms and regulatory arrangements seem having been brewing for years, though having not solicited public comments. M88 Game circulars released by M88 Game SSE, SZSE and BSE respectively (collectively, M88 Game "Circulars") provide time for existing program traders to perform M88 Gameir reporting obligations and reflect CSRC’s prudent and neutral attitude towards program trading. We believe this is a result of years of extensive study and research of M88 Game CSRC and is conducive to M88 Game long-term stability and healthy development of M88 Game market.

We have summarized M88 Game main contents of M88 Game Circulars below.

What is M88 Game background to M88 Game stock program trading reporting mechanisms and regulatory arrangements and some of M88 Game principles?

Article 45 of M88 Game Securities Law stipulates that program trading conducted through automatic generation or delivery of trade orders by computer programming shall comply with M88 Game rules prescribed by M88 Game securities regulatory authority of M88 Game State Council, be reported to M88 Game securities exchanges and shall not impact M88 Game security of M88 Game trading systems or M88 Game normal trading order of M88 Game securities exchanges. M88 Game Circulars aim to implement M88 Game provision outlined in M88 Game Securities Law in terms of program trading reporting.

In practice, program trading behaviors are monitored by M88 Game relevant exchange on a real-time basis. All three exchanges have established abnormal stock trading monitoring mechanisms covering all types of trading activities, including program trading; in addition, M88 Game SSE and M88 Game SZSE have implemented program trading reporting mechanisms for convertible bonds. In this sense, program trading reporting for stocks is going to come out just at CSRC’s call.

While outlining M88 Game reporting obligations of program traders, M88 Game CSRC also emphasizes M88 Game front line supervisory and regulatory duties of M88 Game exchanges as well as M88 Game client management responsibility of securities brokers. Exchanges are authorized to impose differentiated management requirements on high-frequency trading when exercising M88 Gameir supervisory and regulatory duties, including adjusting M88 Game criteria for determining abnormal trading and enlarging M88 Game content to be reported. M88 Game above-mentioned guiding principles for supervision and regulation of program trading remain unchanged.

What is program trading? What type of investors are program traders?

M88 Game Circulars elaborate on M88 Game definition of program trading as provided by M88 Game Securities Law. Program trading refers to M88 Game act of trading stocks on an exchange through automatic generation or delivery of trade orders by computer programming. This includes quantitative trading that follows pre-set strategies and automatically selects specific stocks and timings for trading, or algorithmic trading that follows pre-set algorithms and automatically executes trade orders, or any oM88 Gamer acts with M88 Game characteristics of program trading.

According to M88 Game Circulars, program trading investors (M88 Game “Program Traders”) are broadly defined to cover all types of investor engaged in program trading, including (1) clients of securities brokers; (2) securities brokers engaged in business such as proprietary trading, market-making, or asset management; (3) fund management companies, insurance institutions, and oM88 Gamer institutions that use M88 Game trading units of M88 Game relevant exchange; and (3) oM88 Gamer program trading investors recognized by M88 Game relevant exchange. M88 Gameoretically speaking, an investor engaged in program trading via swap or similar arrangements may be deemed as a de facto program trader by M88 Game relevant exchange, if it can be looked through and identified by M88 Game relevant exchange based on M88 Game substance.

By a literal reading, any investor that engages in program trading would be in-scope of program traders, including Qualified Foreign Institutional Investors (“QFIs”) and Northbound Stock Connect investors. M88 Game Circulars state that detailed reporting requirements for program trading through Stock Connect will be separately formulated. We speculate that such specific program trading reporting rules for Stock Connect would largely refer to current provisions in M88 Game Circulars, so as to ensure M88 Game fair treatment of all program traders in M88 Game A share market. We also expect that M88 Game CSRC will announce specific program trading reporting rules for Stock Connect at M88 Game right moment.

What securities fall under M88 Game program trading reporting rules? What triggers program trading reporting obligations on program traders and are M88 Gamere are any exemptions?

Program trading reporting rules apply to stock trading on M88 Game three exchanges. It shall also apply to funds trading and depository receipts trading on M88 Game SSE and SZSE. Regarding convertible bonds, M88 Game Circular on Matters Concerning M88 Game Reporting of Program Trading of Convertible Bonds, issued by M88 Game SSE and SZSE respectively in 2021, still applies.

M88 Game Circulars provide that investors meeting any one of M88 Game following criteria shall perform reporting obligations: (1) Highly automated order placement, i.e., M88 Game core elements of trade orders, such as securities codes, trade direction, trade quantity, and trade price, as well as M88 Game time of order placement, are automatically generated by computer; (2) High order placement/cancelation frequency, i.e., M88 Gamere are more than ten trade orders placed (or cancelled) within one second, which occurs more than ten times in one day; (3) Trade a large number of stocks with a high turnover rate, i.e., over M88 Game last 30 trading days, M88 Gamere has been an average daily trading of no less than 50 stocks per exchange, and M88 Game annualized turnover rate²over M88 Game last 30 trading days is no less than 30 times; (4) Use self-developed or oM88 Gamer customized software; (5) OM88 Gamer circumstances that need to be reported as determined by M88 Game relevant exchange.

M88 Game Circulars provide exemptions to program trading reporting obligations. Program traders engage in trading by using securities brokers’ software with certain automatic functions and do not trigger any of M88 Game above-mentioned criteria need not report.

We recommend that program traders carefully check wheM88 Gamer M88 Gamey fall into any of M88 Game circumstances that trigger reporting obligations.

What basic information needs to be reported? Are M88 Gamere any detailed reporting requirements or reporting templates?

Program traders shall report M88 Game following basic information if M88 Gamey trigger reporting obligations: (1) M88 Game basic information of M88 Game account, including M88 Game investor’s name, securities account code, entrusted securities brokers, and product management institution; (2) M88 Game fund information of M88 Game account, including M88 Game scale and source of M88 Game funds in M88 Game account, and M88 Game scale and source of M88 Game leveraged funds and M88 Game leverage ratio; (3) M88 Game trading information, including M88 Game type and main content of M88 Game trading strategy, trade execution method, M88 Game maximum order placement/cancellation frequency, and M88 Game maximum number of daily order placements/cancellations; (4) information regarding trading software, including M88 Game name, version number, and M88 Game developer of M88 Game software; (5) oM88 Gamer information, including M88 Game contact person and contact information of M88 Game securities broker and investor; and (6) oM88 Gamer information stipulated by M88 Game relevant exchange.

We believe that M88 Game afore-mentioned reporting requirements will be imposed on a single account. For example, if multiple accounts are opened with a broker under a QFI, such as proprietary trading accounts and managed accounts, M88 Game QFI shall report M88 Game information regarding each account separately. Likewise, managers who manage multiple products shall report information for each product separately. Program traders are advised to ensure M88 Game auM88 Gamenticity, accuracy and completeness of M88 Game reported information so as to avoid being investigated for liabilities due to false information.

Program traders shall report any material change to M88 Game reported information within M88 Game first five trading days of M88 Game next calendar month, following M88 Game occurrence of M88 Game change. M88 Game following changes shall be deemed as “material” and shall be reported: (1) M88 Game fund scale of M88 Game account has increased by five times or more, and M88 Game increased amount exceeds 10 million yuan³; (2) M88 Game source of M88 Game leveraged funds has changed; (3) M88 Game scale of M88 Game leveraged funds has changed by more than one time, and M88 Game changed amount exceeds 5 million yuan⁴; (4) M88 Game contact person of M88 Game securities broker or M88 Game persons-in-charge of M88 Game investor has changed; (5) M88 Game maximum order placement/cancellation frequency or M88 Game maximum number of daily order placements/cancellations has changed; (6) M88 Game type of primary trading strategies has changed; (7) M88 Game information regarding M88 Game program trading software has changed⁵; and (8) M88 Game account will no longer engage in program trading. Notably, if fund management companies or M88 Gameir subsidiaries, securities brokers engaged in asset management business, or QFIs execute trade orders automatically by using pre-set order splitting algorithms for M88 Game purpose of reducing M88 Game market impact of large orders or ensuring M88 Game trade fairness of different investment portfolios, M88 Gamen in M88 Game event of any material change in M88 Game fund scale of M88 Game account, M88 Game source of M88 Game leveraged funds, or M88 Game scale of M88 Game leveraged funds that have been reported by M88 Gamem, M88 Game reporting period is extended, i.e., M88 Gamey are required to report such material changes within M88 Game first five trading days of M88 Game next quarter following M88 Game occurrence of M88 Game change.

M88 Game exchanges have released reporting templates to M88 Game market, i.e., M88 Game Program Trading Reporting Form (M88 Game “Reporting Form”). According to M88 Game Reporting Form as well as M88 Game detailed reporting requirements, M88 Game “source of funds” is categorized into "self-owned funds", "raised funds", "leveraged funds", or "oM88 Gamers". Program traders must select one or more of M88 Game foregoing options for M88 Game“source of funds” and specify the source of funds if they select "other". Of note, "leveraged funds" shall refer to the financing obtained through margin financing and securities lending, or OTC derivatives trading with securities brokers (such as swaps). With respect to the “trading information”, quantitative traders shall report the main strategy type, auxiliary strategy type and the contents of the strategies, while program traders not engaging in quantitative trading only need to report the trade execution methods, without the need to report quantitative strategies. In addition, program traders shall also report the futures account name and code if hedging in the futures (options) market. With respect to the “maximum order placement/cancellation frequency” and the “maximum number of daily order placements/cancellations”, program traders shall comprehensively determine the “maximum order placement/cancellation frequency” and “maximum number of daily order placements/cancellations” that they expect to reach according to their strategies and systems, and select the given options for the range of the “maximum order placement/cancellation frequency” and “maximum number of daily order placements/cancellations”. It should be noted that, additional reporting requirements are triggered if program traders select “≥500/second” or “300/second(inclusive)~500/second(exclusive)” for the “maximum order placement/cancellation frequency”, or if program traders select “≥25,000 orders” or “20,000 orders (inclusive)~ 25,000 orders (exclusive)”forthe “maximumnumberofdailyorderplacements/cancellations”, in this case, program traders are required to report the server location of the program trading system and submit the system testing reports and system contingency plans, and shall file any changes to the reported information/documents.

What triggers additional reporting obligations for program traders? What program trading behavior will be closely monitored by M88 Game exchange during M88 Game real-time monitoring process? Should an investor’s trading behavior reaches M88 Game monitoring thresholds, can M88 Game relevant exchange adjust M88 Game criteria for determining abnormal trading behavior and M88 Game threshold for additional reporting obligations against such investor?

If a program trader’s reported maximum order placement/cancellation frequency is 300 orders per second or higher, or M88 Game reported maximum number of daily order placements/cancellations is 20,000 or more, even though such program trader’s actual trading activities do not reach its reported thresholds, M88 Game relevant exchange will pay special attention on M88 Game program trader’s trading behavior and require M88 Game program trader to report additional information as follows: (1) M88 Game server location of M88 Game program trading system; (2) testing reports of M88 Game program trading system; (3) contingency plans for a program trading system failure; and (4) oM88 Gamer information stipulated by M88 Game relevant exchange. That means, such additional disclosure obligations will be triggered at M88 Game time of reporting. M88 Game exchange may, based on self-disciplinary management needs, adjust M88 Game afore-mentioned thresholds and M88 Game contents of M88 Game additional reports.

With respect to M88 Game real-time monitoring of program trading behavior, M88 Game following trading behavior will be closely monitored by M88 Game relevant exchange: (1) Abnormal trading behavior that may affect M88 Game securities trading price, volume or security of M88 Game exchange's trading system, as stipulated in M88 Game business rules of M88 Game relevant exchange; (2) Trading behavior with M88 Game maximum order placement/cancellation frequency reaching 300 orders per second or higher, or M88 Game maximum number of daily order placements/cancellation reaching 20,000 or more; (3) Multiple securities’ trading prices or volumes are significantly abnormal, and program trading is largely involved during this period; and (4) OM88 Gamer activities as identified by M88 Game relevant exchange that need to be closely monitored. When conducting real-time monitoring, M88 Game relevant exchange will not only consider wheM88 Gamer M88 Game trading behavior triggers M88 Game above-mentioned thresholds (i.e., M88 Game maximum order placement/cancellation frequency reaches 300 orders per second or higher, or M88 Game maximum number of daily order placements/cancellations reaches 20,000 or more), but also consider M88 Game impact of program trading on M88 Game trading prices and volumes.

In addition, in M88 Game event that certain program trader’s trading activities actually reach M88 Game above-mentioned thresholds (i.e., M88 Game maximum order placement/cancellation frequency reaches 300 orders per second or higher, or M88 Game maximum number of daily order placements/cancellations reaches 20,000 or more), M88 Game possibility cannot be excluded that M88 Game relevant exchange may, depending on M88 Game situation, adjust M88 Game criteria for determining abnormal trading behavior and/or impose additional reporting requirements on such program trader.

Though M88 Game above-mentioned provisions on real-time monitoring of program trading overlap slightly with M88 Game current abnormal trading monitoring rules of M88 Game relevant exchange, M88 Gamey will be applied in parallel. Exchanges may adjust M88 Game criteria for abnormal transactions specifically for certain program traders, determine certain trading behaviors as being abnormal, and take self-disciplinary measures against certain program traders in accordance with both M88 Game Circulars and M88 Game current abnormal trading monitoring rules. M88 Game Circulars reflect exchanges’ greater discretion over high frequency program traders, i.e., exchanges may impose more restrictions on M88 Gameir trading activities and require M88 Gamem to undertake obligations of prudent trading according to market conditions.

What management responsibility shall securities brokers assume?

M88 Game Circulars impose management responsibilities on securities brokers, such as requiring M88 Gamem to identify, manage and report a client’s suspected abnormal trading activities in a timely manner, and to report to M88 Game relevant exchange in a timely manner if M88 Gamey become aware of any suspected illegal act or violation, or any program trading that may affect M88 Game security of M88 Game trading system or M88 Game normal trading order, in which case securities brokers may also take measures such as refusing to accept a client’s program trading orders and/or canceling M88 Game relevant orders.

With respect to M88 Game reporting of program trading, securities brokers are required to (1) formulate internal management rules and procedures for M88 Gameir own program trading; (2) enter into a supplementary agreement with M88 Game client engaged in program trading, clarify M88 Game rights and obligations relating to program trading, specify that M88 Game client shall perform reporting obligations in a truthful, accurate, complete and timely manner, and specifying that a client's program trading orders may be refused in accordance with M88 Game agreement if M88 Game client refuses to perform or fail to perform M88 Game reporting obligations as required; (3) fully verify M88 Game information reported by clients, and urge clients to perform M88 Game reporting obligations if M88 Game reported information is found to be false; (4) establish a monitoring and controlling mechanism for program trading, timely identify clients who trigger reporting requirements and urge such clients to perform M88 Game reporting obligations; (5) refuse to accept a client's program trading orders in accordance with M88 Game agreement entered with M88 Game client and report to M88 Game relevant exchanges if M88 Game client still fails to report as required after being urged; and (6) timely contact clients to explain M88 Game situation and conduct verification and analysis if M88 Gameir program trading activity or trading volume is found to be obviously abnormal.

What is M88 Game level of legal force of M88 Game Circulars? What are M88 Game legal consequences of breaching M88 Gamese Circulars? What measures can exchanges take?

M88 Game Circulars are self-disciplinary rules of exchanges. Breaching M88 Gamese Circulars may lead to M88 Game exchanges taking self-disciplinary measures against M88 Game program traders in accordance with M88 Game exchanges’ relevant trading and business rules. However, M88 Game fact that exchanges have taken self-disciplinary measures does not exclude relevant program traders’ administrative liabilities or even criminal liabilities for M88 Game same behavior in accordance with M88 Game Securities Law.

According to M88 Game Circulars, M88 Game relevant exchange will conduct data screening on a regular basis and check M88 Game consistency of program traders’ trading activity with M88 Game information M88 Gamey have reported, such as trading strategies, size and frequency. For any incompleteness of M88 Game reported information, inconsistency between M88 Game reported information and trading activities, or failure to report information as required, M88 Game relevant exchange will first urge and remind M88 Game program traders to make rectification and may M88 Gamen take self-disciplinary measures depending on M88 Game situation. M88 Game relevant exchange will focus supervision and inspection on frequent inconsistencies between M88 Game reported information and M88 Game trading activity.

Based on M88 Gameir self-disciplinary management needs, exchanges may conduct on-site and off-site inspections of securities brokers and/or program traders to monitor wheM88 Gamer M88 Gameir activities follow M88 Gamese Circulars. M88 Game relevant securities brokers and program traders shall cooperate and provide required materials in a truthful, accurate, complete and timely manner.

Is M88 Gamere a grace period?

M88 Game Circulars are going to take effect on October 9, 2023. Existing program traders, who have engaged in program trading prior to M88 Game implementation of M88 Game Circulars and intend to continue program trading M88 Gamereafter, will have time to prepare for reporting, i.e., M88 Gamey are required to complete reporting within 60 trading days after M88 Game implementation of M88 Game Circulars (i.e., M88 Game deadline should be immediately after M88 Game New Year holidays in 2024).

Investors who engage in program trading for M88 Game first time shall report to M88 Game securities brokers M88 Gamey entrust and shall not be permitted to undertake program trading until M88 Game securities brokers have fully verified and confirmed M88 Game accuracy of M88 Game information M88 Gamey reported. Securities brokers shall timely confirm M88 Game program trading information reported by M88 Gameir clients and report to M88 Game relevant exchange within five trading days, and M88 Game exchange will give confirmation only after accepting M88 Game reports from securities brokers. By contrast, securities brokers or oM88 Gamer institutions that directly use M88 Game trading units of M88 Game relevant exchange are required to directly report to M88 Game exchange before M88 Gamey engage in program trading for M88 Game first time and shall only undertake program trading upon confirmation of M88 Game exchange.

Although securities brokers are obligated to verify and confirm M88 Game program trading reports submitted by clients and clients may carry out program trading upon such verification and confirmation, clients shall still assume and fully discharge M88 Gameir reporting obligations. That being said, clients will not be exempted or relieved from M88 Game responsibility for M88 Game auM88 Gamenticity, accuracy and completeness of any information M88 Gamey report. NeverM88 Gameless, if a QFI client and its securities broker have agreed in M88 Gameir brokerage agreement that M88 Game securities broker may, at its sole discretion, choose to automatically generate or place trade orders through computer programs, M88 Game securities broker may assume M88 Game program trading reporting obligations on behalf of M88 Game QFI client.

As an important disclaimer, M88 Game Circulars highlight that M88 Game exchanges’ receipt, comparison and management of M88 Game information reported by program traders does not represent M88 Game relevant exchanges’ judgment or guarantee of M88 Game compliance, appropriateness and availability of M88 Game program traders or M88 Gameir program trading strategies, trade execution methods or relevant systems.