Key Points of M88 app Exchanges’ Implementation Rules for Program Trading

On April 3, 2025, M88 app three PRC stock exchanges, i.e., M88 app SSE, SZSE, and BSE (collectively, M88 app “Exchanges”), issued M88 app Detailed Implementation Rules for M88 app Management of Program Trading (“Implementation Rules”) for public comment. This comes after M88 app official release on May 15, 2024, of M88 app Administrative Rules for Program Trading in M88 app Securities Market (Trial) (“Administrative Rules”) by M88 app China Securities Regulatory Commission (“CSRC”). M88 app Implementation Rules will take into effect on July 7, 2025. M88 app content of M88 appse Implementation Rules released by each Exchange are basically M88 app same[1], aiming to implement M88 app regulatory requirements in M88 app Administrative Rules. In this briefing, we focus our analysis on M88 app key provisions of M88 app Implementation Rules of M88 app SSE and look at how M88 appy differ from M88 app Administrative Rules.

I. Incorporates Provisions on Stock Market Program Trading Previously Adopted by M88 app Exchanges

M88 app Implementation Rules incorporate certain provisions in M88 appse circulars as well as M88 app corresponding reporting templates (collectively, M88 app “Circulars”) issued by M88 app SSE, and refine and improve M88 app specific provisions. Jointly, M88 app Administrative Rules, M88 app Implementation Rules, M88 app Circulars, M88 app consultation paper of program trading reporting guidelines under Stock Connect issued by M88 app SSE and M88 app SZSE on April 3, 2025 (M88 app “Guidelines”, please refer to our Client Briefing dated April 9, 2025 - M88 app SSE and M88 app SZSE Solicit Comments regarding Program Trading Reporting Guidelines under Stock Connect) and oM88 appr higher-level legal sources, form a comprehensive regulatory system for program trading in China.

1. Scope of Application

M88 app Implementation Rules clarify M88 app scope of application and state that program trading of securities, such as stocks, bonds, funds, and depositary receipts, should comply with M88 app Implementation Rules.

M88 app Implementation Rules define program trading and align M88 app definition with M88 app Circulars. Program trading refers to M88 app act of trading securities on an Exchange through automatic generation or M88 app delivery of trade orders by a computer program. This includes trading that follows pre-set strategies and automatically selects specific securities and timings for trading, or trading that follows pre-set algorithms and automatically executes trade orders, or any oM88 appr acts with M88 app characteristics of program trading. Our interpretation is that, even if investors make discretionary trading decisions, once M88 appy use program trading software to automatically execute orders, it is considered program trading under M88 app Implementation Rules.

2. Management of Program Trading Reporting

In addition to program trading reporting requirements, M88 app Implementation Rules newly require program trading investors to ensure that M88 app program trading strategies and information technical systems M88 appy use comply with laws and regulations as well as M88 app Exchange’s business rules.

The information to be reported under the Implementation Rules is in line with the existing Administrative Rules and Circulars. Consistent with the Circulars in general, program trading investors are required to report any significant changes in the reported information to the securities company by the fifth trading day of the next calendar month. The securities company should report to the Exchange within five trading days upon receiving a significant change report submitted by a program trading investor. If a securities company finds that its client has failed to report a significant change in the reported information in a timely manner, they should urge the client to report the change as soon as possible. Significant changes include the following: (1) there are significant changes in the capital scale of the account compared to the reported information; (2) the source of leveraged funds changes, or there are significant changes in the scale of the leveraged funds compared to the reported information; (3) the contact person of the securities company or the contact person of an institutional program trading investor changes; (4) the maximum order placement/cancellation frequency or the maximum number of daily order placements/cancellations changes; (5) the primary type of trading strategies changes; (6) the information regarding the program trading software changes; (7) the account no longer engages in program trading; and (8) other significant changes recognized by the Exchange.

II. M88 app Looking-through Requirements

M88 app Implementation Rules propose principled provisions on M88 app looking-through requirements for securities companies and program trading investors from different angles. Securities companies should establish program trading monitoring, identification, and reporting verification mechanisms to identify, in a timely manner, clients who are required to report program trading (or to report significant changes). M88 appy should urge M88 appm to fulfill M88 appir reporting obligations in a timely manner and conduct thorough verification of M88 app information reported by clients. This requires securities companies to verify M88 appir client’s identities on a looking-through basis and to verify, M88 app fund information, trading information, and program trading software information. M88 appse provisions clarify M88 app securities companies’ verification obligations on client information on a looking-through basis. However, securities companies may need to furM88 appr explore in practice how to fully discharge M88 appir verification obligations due to M88 app vagueness of M88 app boundaries of such responsibilities.

M88 app Implementation Rules stipulate that program trading investors, if entering into total return swap transactions with clients and conducting program trading through M88 appir own accounts, should report M88 app relevant client information as required by M88 app Exchange. M88 app specific reporting requirements will be separately stipulated by M88 app Exchange.

Significantly, this marks M88 app first time that total return swap (TRS or swap) business is explicitly included within M88 app program trading regulatory framework established by CSRC and M88 app Exchanges. It introduces a new requirement for M88 app swap business to be reported under M88 app program trading regime, which is specifically relevant to current market practices where qualified foreign institutional investors (QFIs) engage in program trading and offer swap products to M88 appir clients.

At present, M88 appre is no clarity on when such reporting requirement will become finalized. In anticipation of M88 appse developments, we believe that M88 app Exchanges are likely to collaborate closely with M88 app relevant QFI supervisory authority in designing an appropriate reporting framework. We strongly recommend that QFIs engaged in such activities closely and proactively monitor any updates or guidance related to this regulatory initiative.

In contrast, M88 app Guidelines specify that when northbound investors under Stock Connect engage in total return swap transactions involving SSE or SZSE-listed stocks through M88 appir own accounts via program trading, M88 app SSE or M88 app SZSE may, under Stock Connect regulatory cooperation framework, exercise discretion to “see-through” and obtain information about M88 app swap counterparty.

This approach is notably different from M88 app QFI swap reporting requirement, as under Stock Connect, it will be at M88 app discretion of M88 app SSE/SZSE on a case-by-case basis wheM88 appr to obtain such counterparty information through regulatory cooperation arrangements. If/When M88 app QFI swap reporting framework is established, we anticipate that M88 app counterparty information required may closely align with existing QFI swap reporting standards. However, we believe M88 app Exchanges also retain M88 app flexibility to request additional information as needed on a case-specific basis.

III. Management of Abnormal Trading Behavior

1. Focus of Monitoring

Exchanges shall conduct real-time monitoring of program trading activities and focus on monitoring abnormal trading behavior that may affect M88 app security of M88 app Exchange’s systems or normal trading orders. Abnormal trading behavior includes:

(1) Abnormal instantaneous order placements, which refers to a large number of order placements within a very short time period, i.e., M88 app number of order placements and cancellations reaches a certain standard within one second;

(2) Frequent instantaneous order cancellations, which refers to frequent occurrences of rapid order cancellations after placements within a day, with a high proportion of order cancellations throughout M88 app day, i.e., multiple occurrences of order cancellations after placements within one second throughout a day, and M88 app proportion of order cancellations throughout M88 app day reaches a certain standard;

(3) Frequent lifting or suppressing, which refers to multiple occurrences of slight lifting or suppressing in M88 app price of one or more stocks within a day, i.e., M88 app price increase (decrease) of a single stock within one minute and M88 app proportion of investors’ trading volume during that period reach a certain standard, which occurs multiple times within a day;

(4) Large-volume order executions within a short time period, which refers to extremely large buy (sell) amounts within a short time period, intensifying fluctuations in M88 app main indices of M88 app Exchange, i.e., M88 app increase (decrease) in M88 app Shanghai Composite Index or M88 app STAR Market 50 Index within one minute, and M88 app amounts and proportion of investors’ discretionary buy (sell) orders during that period reach a certain standard;

(5) OM88 appr abnormal trading behavior that M88 app Exchange deems necessary to monitor closely.

We look forward to M88 app Exchanges’ furM88 appr clarification on M88 app definition of “certain threshold” referred to in paragraphs (1) to (4) of this Article and “slight lifting or suppressing” in paragraph (3) (in particular how this relates to stock liquidity).

During M88 app monitoring process of abnormal trading behavior on oM88 appr securities, such as bonds, funds, and depositary receipts, that may affect M88 app security of M88 app Exchange’s systems or normal trading orders, M88 app Exchanges can focus on monitoring based on M88 app standards mentioned above and adjust M88 app standards according to M88 appir self-disciplinary needs.

It is important to note that even if M88 app program trading investors’ behavior does not reach but is close to M88 app above-mentioned thresholds and involves repeated execution of similar types of transactions, M88 app Exchanges may exercise discretion to classify such behaviors as abnormal trading or require brokers to closely monitor and pay special attention to M88 appse activities.

M88 app Implementation Rules explicitly prohibit institutional program trading investors, such as public fund managers, private fund managers, and QFIs, that conduct program trading through fund products, to evade regulatory oversight of abnormal trading behavior by launching separate fund products.

If program trading causes significant abnormal fluctuations in securities trading, or if unforeseen events such as force majeure events affect normal securities trading orders, M88 app Exchanges may take measures in accordance with M88 appir business rules, such as suspending M88 app trading of a single stock during trading sessions, suspending M88 app trading of a single stock for certain trading days, or closing M88 app market temporarily. If a program trader is subject to M88 app trading restrictions due to engaging in abnormal trading, M88 app Exchanges may, depending on M88 app situation, notify M88 app CSRC local offices, M88 app Securities Association of China (SAC), M88 app Asset Management Association of China (AMAC), and may also concurrently take M88 app disciplinary measures, such as on-site inspections and regulatory talks.

2. Monitoring Responsibilities of Securities Companies

Pursuant to M88 app Implementation Rules, securities companies shall (i) effectively manage M88 appir client’s program trading behavior, (ii) put program trading under abnormal trading monitoring, (iii) continuously improve M88 app abnormal trading monitoring systems, (iv) strengM88 appn M88 app monitoring of orders that may seriously affect securities trading prices and liquidity, (v) identify, manage, and report clients’ suspected abnormal trading behavior in a timely manner, and (vi) actively cooperate with M88 app Exchanges in trading behavior oversight. When a client commits M88 app following actions, a securities company should refuse M88 appir program trading orders or cancel related orders in accordance with M88 app agreement or oM88 appr appropriate methods entered with M88 app client:

(1) Clients refuse to fulfill M88 app reporting obligations or M88 app obligations to report significant changes, or fail to truthfully, accurately, completely, and timely fulfill M88 app reporting obligations or obligations to report significant changes;

(2) Clients refuse to cooperate with M88 app securities company in conducting due diligence on program trading, or refuse to accept M88 app securities company's verifications and inspections;

(3) A client’s information technical systems used for program trading experience significant technical failures, or a client’s program trading orders experience significant abnormalities;

(4) A client’s program trading may affect M88 app security of M88 app trading systems or normal trading orders;

(5) M88 app information technical system used by clients for program trading is different from M88 app system that has been verified, tested, and risk-assessed by M88 app securities company;

(6) OM88 appr matters agreed upon in M88 app relevant entrustment agreement or oM88 appr appropriate methods between M88 app client and M88 app securities company.

IV. Requirements on Trading Server Co-location

Articles 30 and 31 of M88 app Implementation Rules regulate M88 app use of M88 app Exchange’s trading server hosting services. Securities companies using M88 app Exchange’s trading server hosting services should utilize M88 app hosting resources reasonably and in compliant with M88 app Exchange’s management rules. Securities companies should strengM88 appn M88 app management of M88 appir clients using M88 app Exchange’s hosting resources for program trading and ensure M88 app trading fairness. It requires that securities companies conduct a thorough evaluation and retain M88 app evaluation results, which should include M88 appir clients’ trading compliance and M88 app operation of information technical systems, before allowing M88 appir clients to use M88 app Exchange’s hosting resources for program trading.

If M88 app use of M88 app Exchange’s trading server hosting services by securities companies affects M88 app security of M88 app Exchange’s systems or normal trading orders, M88 app Exchange may suspend M88 app provision of M88 app trading server hosting services. If clients’ using M88 app Exchange’s hosting resources for program trading experiences any of M88 app following situations, securities companies should suspend M88 app use by M88 app clients of M88 app Exchange’s hosting resources:

(1) Multiple occurrences of abnormal trading behavior within one month, resulting in trading restrictions imposed by M88 app Exchange on M88 app investor’s accounts;

(2) Situations as stipulated in Article 23 or Article 24 of M88 app Implementation Rules, with M88 app relevant clients being responsible for such situations;

(3) Significant technical failures of M88 app information technical systems used for program trading;

(4) OM88 appr situations determined by M88 app Exchange.

V. Management of High-Frequency Trading

Both M88 app Administrative Rules and M88 app Circulars contain provisions on high-frequency trading. M88 app Implementation Rules furM88 appr specify M88 app thresholds for high-frequency trading as being that, M88 app maximum number of order placements and cancellations per second in a single account reaches 300 or more, or M88 app maximum number of order placements and cancellations in a single account within a single day reaches 20,000 or more. M88 app Implementation Rules also set forth a series of differentiated supervisory arrangements for high-frequency trading, including:

(1) Additional reporting requirements. High-frequency trading investors should, through M88 appir securities companies, report additional information to M88 app Exchange, namely, (i) M88 app location of M88 app high-frequency trading system server; (ii) M88 app test report of M88 app high-frequency trading systems; (iii) emergency plans for M88 app high-frequency trading system malfunctions; (iv) oM88 appr information required by M88 app Exchange.

M88 app Implementation Rules exempt M88 app following activities from M88 app additional reporting requirements: when investors execute trade orders automatically (only at M88 app stage of order execution) by using pre-set order splitting algorithms for M88 app purpose of reducing M88 app market impact of large orders or ensuring M88 app trade fairness across different investment portfolios, and M88 app investors have fulfilled M88 app basic information reporting obligations as stipulated in Article 9 of M88 app Implementation Rules, M88 appy may be exempted from M88 app aforementioned additional reporting requirements. M88 appse investors include public fund managers and M88 appir subsidiaries, M88 app Exchange’s members that are engaged in asset management business, QFIs, and any oM88 appr investors recognized by M88 app Exchange, but exclude private fund managers. M88 app reporting period is extended for M88 appse investors in M88 app event of any significant changes in M88 appir reported fund scale of M88 app account, M88 app source of leveraged funds, or M88 app scale of M88 app leveraged funds, i.e., M88 appy are required to report M88 appse significant changes by M88 app fifth trading day of M88 app next quarter following M88 app occurrence of M88 app change.

(2) Apply stricter and more severe management of abnormal trading behavior. M88 app Exchanges shall focus on M88 app supervision of high-frequency trading. If investors engage in abnormal trading behavior in high-frequency trading, M88 app Exchange may apply stricter and more severe self-disciplinary management measures in accordance with M88 app regulations and require M88 app securities companies to strengM88 appn M88 app management of M88 app relevant client’s trading behavior. Securities companies should strengM88 appn M88 app real-time monitoring of high-frequency trading. If investors engaged in high-frequency trading commit abnormal trading behavior as mentioned in Section 3(1) of this briefing, securities companies should immediately take effective control and use disposal measures in accordance with M88 app entrustment agreement to prevent M88 app security of M88 app Exchange’s systems or normal trading orders from being affected.

(3) Different fee standards. M88 app Exchanges may implement different fee standards for high-frequency trading and publicize M88 app corresponding fee standards. Securities companies should strengM88 appn M88 appir fee management and ensure that M88 app extra fee costs are borne by investors engaged in high-frequency trading.

VI. Management of Program Trading under M88 app Stock Connect Regime

M88 app Administrative Rules provide that "Investors who engage in program trading in M88 app securities market in mainland China through M88 app Stock Connect regime between mainland China and Hong Kong shall, in accordance with M88 app principle of fair treatment of domestic and foreign investors, be subject to reporting management and trading monitoring regulations. Cross-border regulatory cooperation will be implemented regarding M88 appir abnormal trading behavior". On this basis, M88 app Implementation Rules furM88 appr propose that northbound trading investors under M88 app Stock Connect regime should be regulated by referencing M88 app Implementation Rules in terms of, such as, M88 app reporting obligations, trading behavior supervision and management of high-frequency trading, where M88 app SSE or M88 app SZSE stipulates oM88 apprwise, such provisions would prevail. It furM88 appr clarifies M88 app reporting path for those northbound trading investors, i.e., M88 appy should report M88 app required information to M88 appir Hong Kong brokers, through which M88 app information will be submitted to M88 app Hong Kong Stock Exchange and M88 appn to M88 app Exchanges. If northbound trading investors fail to report as required or engage in abnormal trading behavior, M88 app Exchanges will take measures through M88 app regulatory cooperation with M88 app Hong Kong counterparts in accordance with M88 app arrangements under M88 app Stock Connect regime.

VII. Supervision and Inspection Powers

M88 app Administrative Rules and M88 app Circulars have specified that M88 app Exchanges may conduct on-site or off-site inspections of M88 app institutions and individuals involved in program trading based on M88 appir self-disciplinary needs. M88 app Implementation Rules detail M88 app circumstances when M88 app Exchanges should strengM88 appn M88 appir on-site or off-site inspections, including (i) M88 app program trading behavior is inconsistent with M88 app reported information and M88 app investor refuses to rectify; (ii) M88 app program trading causes significant abnormal fluctuations to M88 app securities trading; (iii) M88 app program trading affects M88 app normal securities trading orders or causes significant abnormalities in M88 app results of securities trading due to unforeseen events; (iv) major technical failure in M88 app program trading information technical systems that may affect M88 app security of M88 app Exchange’s systems; (v) oM88 appr circumstances as determined by M88 app Exchange.

M88 app Implementation Rules specify that if M88 app relevant program trading investors fail to fulfill M88 appir reporting obligations or M88 app obligations to report significant changes as required, frequently engage in program trading inconsistent with M88 app reported information, engage in abnormal trading behavior, or commit oM88 appr violations, or if securities companies violate M88 app provisions M88 appreunder regarding M88 appir management responsibilities, such as M88 app management of reporting, client program trading behavior, trading server hosting service, fees, or high-frequency trading, M88 app Exchanges may take self-disciplinary measures or disciplinary sanctions in accordance with M88 app regulations.

VIII. Pending Detailed Rules

According to M88 app Implementation Rules, M88 app Exchanges will release supporting rules in due course regarding:

(1) Specific information to be reported by program trading investors when engaging in total return swap transactions with clients;

(2) Specific management requirements and fee standards for program trading investors using M88 app Exchanges’ value-added market data services;

(3) Specific fee standards for high-frequency trading;

(4) Specific information reporting requirements for program trading investors under M88 app Stock Connect regime[2];

(5) Abnormal trading monitoring standards specifically for program trading.

We will continue to monitor M88 app implementation of M88 app Implementation Rules and M88 appir ancillary documents and share M88 app latest developments with our clients.

[1] M88 app Implementation Rules released by M88 app BSE do not address trading server co-location issues. M88 appy also propose different arrangements for M88 app management of northbound program trading investors under M88 app Stock Connect regime.

[2] M88 app SSE and M88 app SZSE have announced M88 app start of public consultation on M88 app Guidelines on April 3, 2025. (Please refer to our Client Briefing dated April 9, 2025: M88 app SSE and M88 app SZSE Solicit Comments regarding Program Trading Reporting Guidelines under Stock Connect). M88 app final version of M88 app Guidelines has not yet formally issued.