China's securities regulator has instructed brokerages in recent weeks to remove client-dedicated servers from data centers operated by local exchanges, according to people familiar with the matter. This move will affect both Chinese and foreign high-frequency traders.
High-frequency traders in China have long utilized servers located within exchange data centers, owned by brokers, to execute trades. The physical proximity of these servers reduces latency by milliseconds or even microseconds, providing a speed advantage.
"Previously, you were in the house. Now, you're being driven out. It will likely trigger an industry shake-up," said one person with knowledge of the guidance, noting some players will lose a key advantage. Another person said the requirements aim to create a level playing field.
The guidance applies to all major exchanges overseen by the China Securities Regulatory Commission (CSRC), including commodities futures exchanges and stock exchanges, the sources told Reuters. China's major futures exchanges are based in Shanghai, Dalian, Zhengzhou, and Guangzhou.
The CSRC, Citadel Securities, and Jane Street did not respond to requests for comment. Shanghai, Dalian, Zhengzhou, and Guangzhou exchanges also did not immediately reply. The sources requested anonymity as they are not authorized to speak to media.
Bloomberg first reported on Friday that commodities futures exchanges in Shanghai and Guangzhou are among those that have ordered local brokers to shift client servers out of bourse data centers.
This regulatory action occurs as the CSRC steps up efforts to discourage market speculation and protect small investors. Last week, the markets watchdog tightened margin requirements to cool a red-hot stock market. On Friday, the CSRC vowed to maintain market fairness and crack down on excessive speculation and manipulation.
China's benchmark Shanghai Composite Index reached decade-highs last week, with record turnover and leverage trades. Some companies, particularly in AI and semiconductor sectors, surged up to 700% in recent local market debuts.
"They do want to keep the markets focused on investment, as opposed to speculation. That's what it is all about - trying to avoid excessive speculative activity, which they fear could be destabilising," said Shane Oliver, chief economist at AMP. "I think the Chinese authorities are just worried about speculation associated with high frequency trading."
An exchange official, who declined to be identified, stated regulators are moving to ensure trading conditions are fair for every investor.
The latest move could send ripples across China's high-frequency trading market, which has attracted foreign firms like Citadel Securities and Jane Street Group. It may also impact Chinese futures brokerages, which have a relatively large number of high-frequency trading clients, one person said.
There is no official data on the size of China's high-frequency trading market, a segment of the computer-driven "quant fund" industry. Citic Securities estimated this industry was worth 1.55 trillion yuan ($222.60 billion) in 2023.
China has been tightening rules on program trading and high-frequency trading since early 2024, following a computer-driven market crash dubbed China's "quant quake." Last October, China introduced rules regulating futures program trading.
China is not alone in regulating high-frequency trading. The European Union implemented rules in 2018 tightening scrutiny over algorithmic trading. Last year, Indian regulators barred U.S. high-frequency trading firm Jane Street from the local market, citing manipulation of stock indices through derivatives positions.