China Makes Strides on Algorithmic Trading

Terry Flanagan

Demand for market access to China’s securities markets from retail and institutional investors, both domestic and foreign, is fueling a drive for algorithmic trading strategies in both the equities and commodities markets.

China Merchants Securities, a leading domestic brokerage firm, is deploying low-latency algorithmic trading to its Chinese retail customers using the Progress Apama capital markets platform from software provider Progress Software, and also plans to extend its offering to institutional buy-side clients.

Richard Bentley VP, capital markets Progress Software

Richard Bentley,
VP, capital markets,
Progress Software

“Like a number of larger firms in futures and commodities, China Merchants Securities is looking to provide algorithmic trading services to both their retail and institutional clients,” said Richard Bentley, vice-president of capital markets at Progress Software.

China is unique among developed nations because of its high proportion of retail clients. At China Merchants Securities, for example, retail clients account for 89% of brokerage fees, according to a report by research firm Celent.

“As individual investors are generally less mature in their investment approach, a high proportion of individual clients results in fluctuating brokerage revenue at securities firms,” said Celent analyst Hua Zhang.

Algorithmic trading in China has been growing “but few brokerage firms can offer clients a customizable, scalable and robust algorithmic treading platform with low latency”, said GuangYan Wu, general manager of individual investing at China Merchants Securities, in a statement.

Progress Software had previously 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.

China Merchants Securities will be using the Progress Apama capital markets foundation (CMF), which provides applications in market data, analytics, order management and infrastructure.

The current version of CMF, introduced last year, contains support for the FIX protocol, such as dynamically loaded plug-ins to handle different FIX message types, monitoring of message rates and latencies, and integration with CMF’s market data architecture.

“The combination of a rich application foundation within the Apama CMF, in-built market connectivity and Apama CEP engine provides the ideal platform to maximize return on technology investment,” said Bentley at Progress Software.

The use of advanced technologies in China’s securities industry will also create new risk, according to Celent’s Zhang.

“It’s safe to say that algorithmic trading will be used extensively,” he said in the report. “Although regulators appear to take a negative stance towards high-frequency trading, there is high interest from exchanges, clearing institutions and institutional investors.”

Celent estimates that algorithmic trading accounts for 10% and 1.5% of the trading volume in the futures and securities industry, respectively, and these figures will reach 18% and 6% by the end of this year.

Hong Kong’s Securities and Futures Commission (SFC), a regulator, in a 2012 consultation, 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 proposed 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.

“The emergence of algorithmic trading will give rise to new challenges for risk management,” said Zhang.

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