China tightens reins on quant trading after three-day ban on fund

China is tightening regulatory restrictions on its rapidly booming quant trading industry, after freezing the accounts of a major player in the sector for three days in a rare crackdown.

The stock exchanges of key financial hubs Shanghai and Shenzhen issued notices late Tuesday announcing they will deepen their scrutiny of market trades conducted by quant funds — which use advanced computer-driven automated analysis and algorithms to catch opportunities in stocks and commodities — especially of leveraged quantitative products, according to separate Google-translated statements.

The bourses will strengthen and expand the scope of reporting of such trades and improve the monitoring standards for “abnormal” transactions.

The Shenzhen stock exchange also noted that “quantitative trading, especially high-frequency trading, has obvious technical, information and speed advantages over small and medium-sized investors.”

The announcements come after both exchanges implemented a three-day trading ban on one of China’s largest quant funds, Lingjun Investment, which the Shanghai bourse accused of “affecting the security of the Exchange’s system or normal trading order” with a flurry of transactions executed between 09:30 a.m. and 09:31 a.m. local time, according to a Google-translated statement.

The Shenzhen stock exchange issued a similar statement, citing “abnormal trading behavior” between 09:30:00 a.m. and 09:30:42 a.m. local time and adding that Lingjun had been subject to written warnings and other supervisory measures for “abnormal trading” in previous instances, according to a Google translation.

Both platforms said their indexes “fell rapidly” as a result of the Feb. 19 activity.

Lingjun apologized for the incident and acknowledged that its trading volume within one minute of market open was “large” on Feb. 19, adding that it is carrying out a review of its trading activity, according to a Google-translated statement on its website. It also affirmed it is “optimistic about and insists on long-term investment in the long term.”

China’s latest regulatory steps come against a broader restructuring of its troubled financial markets, which have been rattled by turbulence in the property sector and depressed confidence. Earlier this year, Beijing injected a “zero-tolerance” policy against so-called malicious short selling — a trade practice of betting on the price declines of certain assets.

In early February, China’s Cabinet named markets veteran Wu Qing — known as the “Broker Butcher” for his crackdown on traders — as chairman of the China Securities Regulatory Commission.