(Yicai) June 11 -- China is considering improving the supervision of algorithmic trading, or the automated pre-programmed trading of securities, to better regulate high-frequency trading and ensure market fairness, according to a draft proposal issued by the Shenzhen and Shanghai bourses on June 7 which is open to feedback from the public.

The Shanghai Stock Exchange and the Shenzhen Stock Exchange are learning from overseas markets and plan to bring in stricter controls of companies with abnormal trading behaviors, according to the draft which was released in response to a call for better regulation of high-frequency trading from the China Securities Regulatory Commission on May 15.

The proposal focuses on four types of quantitative trading, namely the abnormal instantaneous rate of applications, frequent instantaneous order withdrawals, frequent heavy buying or selling, and large-scale transactions in a short period of time. The public have until June 14 to submit their comments.

Institutions that participate in high-frequency trading should be charged higher fees to increase their trading costs and offset the advantages of algorithmic trading, the draft said. The document defined high frequency trading accounts as an account in a single stock market that submits or withdraws over 300 orders per second, or as many as 20,000 in a single day, it added.

Scrutiny of algorithmic trading accounts should be stepped up, it said. In addition to submitting regular statutory reports to the exchanges, these companies must also provide additional information, such as the location of their servers, system test reports and the emergency measures they have in place if their systems fail.

The proposed measures will help maintain market fairness and prevent market manipulation and unfair trading, sending a positive signal to all market participants, a business manager of Huatai Securities told Yicai.

“The draft will urge quantitative trading institutions to reduce their trading frequency and pay more attention to developing and implementing long-term investment strategies,” said Gu Wangqin, general manager of Yanfu Investments.

Reasonable and all-round supervision will boost investor confidence and attract more funds into the capital market, Gu added.

Brokerages should not give algorithmic stock traders special privileges, the draft added. If there is abnormal trading behavior on the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connect programs, regulatory authorities on the mainland and in Hong Kong need to better co-ordinate their oversight of these accounts.

Editors: Tang Shihua, Kim Taylor