(Yicai Global) Sept. 7 -- The chief of China's main securities regulator spoke about the pros and cons of quantitative trading after investors discussed online about an article that claimed that half of the buoyant mainland bourses' daily turnover consists of algorithms instead of qualitative methods.
Quantitative and high-frequency trading, relatively common techniques in mature capital markets, can easily cause issues such as increased volatility, homogeneous strategies, and unfairness but they also enhance asset liquidity and pricing efficiency, Yi Huiman, chairman of the China Securities Regulatory Commission, said during a keynote speech at the annual meeting of the 60th World Federation of Exchanges yesterday.
A we-media article with the headline of "quantitative trading contributed half of the turnover on the A-share market" went viral on Sept. 3 among Chinese investors. One of them said that quant trading is an "artificial intelligence-driven harvester" that targets qualitative traders.
The investment landscape has been heated. The Shanghai Composite Index closed above 3,600 points yesterday. Meanwhile, the combined turnover of the two mainland markets topped CNY1 trillion (USD154.9 billion) for the 34th straight trading day to tally CNY1.42 trillion.
Private equity institutions' contribution to the volumes is still far below CNY1 trillion, several industry insiders told Yicai Global.
PE institutions' quant products are worth CNY1.1 trillion in total, according to a sell-side analyst. A PE manager said to Yicai Global that the daily turnover rate of all PE institutions adopting automated trading methods is around 25 percent, indicating a scale of about CNY275 billion (USD42.6 billion) per day.
Many quants said algorithmic trading is good for the market. Such programs make money by taking advantage of the market's inefficiency, and thus prompt it to become more efficient, said Hu Bo, fund manager at PE investment information provider Simuwang.
But some PE firms admitted that quants can increase volatility in the short term because they focus on price changes to earn quick profits.
Moreover, the mathematical investment strategy can turn out homogeneous and cause domino effects. If core asset prices continue to decline, funds adopting quantitative methods will drop along with mutual funds, said Lin Jiayi, chief executive of Guangzhou-based Xuanjia Finance.
Editors: Liao Shumin, Emmi Laine, Xiao Yi