Demand for market access to China’s securities markets from retail and institutional investors, both domestic and foreign, has led to huge competition from securities houses to offer the buy side additional services—and algorithmic trading strategies are a major point of differentiation.

“Demand for algo trading in China is largely being driven by the futures markets, which are less restrictive than equity markets and costs are lower,” said Richard Bentley, vice-president of capital markets at software provider Progress Software.

In recent months, Progress Software has announced deals with Nanhua Futures, a Chinese futures broker, and CITIC Securities, China’s largest investment bank by asset value, to use its Progress Apama Algorithmic Trading Platform.

“This is where we are seeing growth in our own business working with major securities houses like CITIC Securities to enable them to provide new trading algorithms to their clients using our Progress Apama platform,” Bentley said.

China is following a path previously trodden by markets in Brazil, Australia, Europe and North America.

“In order to restore confidence in the markets, investors have to receive assurances from regulators that they are qualified to understand, monitor and actively regulate the markets,” said Jason Scharfman, managing partner at Corgentum Consulting, a provider of due diligence services to hedge funds.

Hong Kong’s Securities and Futures Commission (SFC), a regulator, in a consultation published last month, set out proposals on the regulatory requirements for intermediaries to manage and mitigate the risks that arise from trading in an automated environment.

The SFC defines algorithmic trading as computer-generated trading activities created by a pre-determined set of rules aimed at delivering specific execution outcomes.

The consultation proposes that a financial intermediary should ensure that the design and development of its algorithmic trading system and trading algorithms are supported by persons adequately qualified and trained to understand the compliance and regulatory issues which may arise from the use of algorithms, including its trading characteristics and execution behavior, and its potential market impact.

Regulators are, however, trying to strike a balance between allowing new product types and reducing restrictions to participation on the one hand, and ensuring a fair and orderly market on the other. ”The regulators are extremely keen to avoid market instability and market abuse and the pace of regulatory change is slow,” Bentley at Progress Software said.

The Shanghai Stock Exchange said that it plans to boost market supervision by imposing trading limits on “accounts with such abnormal trading behaviors as making orders in a large sum or at high prices, or conducting frequent false orders and withdrawals”.

Should an account fail to correct its rule-breaking behaviors within a certain period, the SSE will identify them as unqualified investors, impose trading restrictions for several days on them and file with regulator the China Securities Regulatory Commission (CSRC) for punishment, with an aim to more accurately and effectively crack down on rule-breaking behaviors.

A characteristic of the Chinese markets remains the high participation of retail investors with an undesirable level of “speculation” rather than longer-term investing.

“A major focus of the regulators like the CSRC is to encourage growth of the institutional market and shift more activity to longer-term investment to improve market quality, reduce volatility and minimize systemic risk,” Bentley said.