China to Crackdown on Electronic Trading

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In a recent article from China has decided to crackdown on the frequency of electronic trading as it poses significant volatility risks to the market. The regulation will ensure that intermediaries that process these trades  “will be responsible for all settlement and financial obligations for orders sent through their systems, including those by clients that can send orders directly to venues.” This isn’t all that surprising as the frequency of electronic trading has become an issue in the U.S. as well. Many firms will place mass amounts of orders and then cancel them immediately having no intention of the trades going through. I read an article in the Wall Street Journal in December that specifically talked about this practice in the U.S. The Bloomberg article refers to an event in 2010 that “saw the Dow Jones Industrial Average briefly lose almost 1,000 points in less than 20 minutes.” The market should be a fair place for investors to put their money and high-frequency electronic trading clearly poses risks to investors and can cause panic. It is so easy to make a trade electronically that it is not unrealistic to think that this service can be abused to skew markets. It will be interesting to see how many intermediary firms close as a result of this new law.

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One Response to China to Crackdown on Electronic Trading

  1. Such trading in the US is profitable in part because those who engage in it can track data that doesn’t execute promptly and get their orders in first. It’s not volatility that’s an issue (except when there’s a software glitch!) but that it’s unfair to “normal” traders. It also places a strain on the hardware capacity of securities markets, depending on how centralized execution is.