Chinese regulators have directed brokers to remove servers used by high-frequency trading clients from data centers operated by local exchanges, according to people familiar with the matter. The order affects commodities futures exchanges in Shanghai and Guangzhou.
The Shanghai Futures Exchange has instructed brokers to relocate equipment for high-speed clients by the end of next month, the people said. Other clients must complete the move by April 30. While the change impacts various firms, high-frequency traders are expected to feel the most significant effect.
Foreign firms including Citadel Securities, Jane Street Group, and Jump Trading are among those whose server access is being affected, the people added, speaking on condition of anonymity because the matter is private. Representatives for China's securities regulator and Citadel Securities did not respond to requests for comment. Jane Street and Jump declined to comment.
The removal of servers from exchange data centers eliminates a speed advantage that high-frequency traders and quantitative hedge funds have long utilized. By placing servers within the exchanges' own facilities, these firms achieved slightly faster execution times—a critical edge in markets where milliseconds matter.
Trading firms do not place servers directly within exchanges but do so through local brokerages that offer the service to secure business. Some Chinese brokers are also moving high-frequency clients' servers out of the Shenzhen Stock Exchange's data centers, one person said.
Following the news, Chinese shares declined. The benchmark CSI 300 Index, which had been up almost 1% earlier, quickly fell into negative territory. On the Shanghai futures exchange, copper dropped around 1% after an earlier gain of as much as 0.6%.
Futures exchanges have made preliminary plans to add two milliseconds of latency to any servers connecting from third-party computer rooms, two of the people said. It is unclear if other exchanges are considering the same approach. This delay would be in addition to the time lag from moving servers away from exchanges.
A delay of just a few milliseconds could impact global firms' high-frequency trading in stock index futures, convertible bonds, and commodities. Some trading strategies may not be viable without the fastest access, though it is unclear how firms might adapt.
"High-frequency traders may adjust their strategies and are likely to reduce their trading frequency in the short term, thus reducing brokerage fees and server hosting fees," said Shen Meng, director at Beijing-based investment bank Chanson & Co. He added that high-frequency traders will "continue to design new solutions in the future," reducing the ultimate impact.
It is unclear whether the timing and details of the changes will apply uniformly across brokers and exchanges. The move follows years of regulatory unease with high-frequency firms, which add liquidity but enjoy execution advantages unavailable to retail investors.
Two years ago, regulators imposed tighter rules on automated stock trading. Officials have also threatened to raise fees on high-frequency traders, although they have not done so yet.