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How Much Potential Does Shanghai’s Quant Market Have?


In September, the China Securities Regulatory Commission (CSRC) announced a probe into the practices of quantitative traders operating in Shanghai and Shenzhen.

The move comes at a time when Chinese stock markets are struggling to recover after all the turbulence of the coronavirus pandemic. The Shanghai Stock Exchange Composite Index, for example, has posted slight declines so far this year. In the further context of sluggish growth and deflation in Beijing, the CSRC suspect there may be public anger at the sight of hedge funds, brokerages, and individual quants making huge profits from economic volatility and share price declines.

The regulator has not yet announced any practical measures in response, but industry figures fear tighter restrictions on short-selling and certain financing activities could be in store. What could this mean for the nascent, but fast-growing, quant industry in China’s financial capital, Shanghai?

This controversy has the potential to rattle an industry which remains in its infancy. Tsu Yu Hsia, a self-employed quant trader in Shanghai, told Disruption Banking that “the market is still relatively new and quant trading funds in Shanghai are still young […] most remain in the process of recruiting employees and finding investors.”

Tsu noted that the beginnings of the industry can only really be traced back to around five years ago, “when a few financiers began to get together and start talking about the interesting ideas and strategies they’d heard from foreign bankers.” A couple of international trading houses came into Shanghai – notably Winton and Two Sigma – but otherwise the space continues to be dominated by small firms or lone traders. The trend of individuals coming into the market accelerated, Tsu pointed out, during the pandemic.

“During Covid, everybody was locked down and people were trying to work out ways to make money from home,” he said. “There was plenty of opportunities to start trading and plenty of time for individuals to educate themselves on things like markets and coding.”

Yu Quan, a Senior Quantitative Trader at SYG Technologies in Shanghai, agreed with this assessment. He predicted that there are only between twenty and thirty quant firms in the city, most of which are run by figures who do not have “long histories in quant trading.”

In some ways, Shanghai would seem an unlikely place for the quant industry to grow given the restrictions which are imposed on critical functions. The Chinese authorities have stringent measures in place to forbid share borrowing, for example, which means that funds cannot short-sell and bet against individual stocks. Individual traders also cannot connect to their exchange through brokers, putting another hurdle in the way of those trying to place orders. Despite this, both Tsu and Yu think that Shanghai’s quant industry has seen success in its short history – and could have significant growth prospects, particularly should the regulators take a more accommodative stance.

Tsu told Disruption Banking that Shanghai has seen success because “it’s a big, international city and one of the primary financial hubs in Asia […] the city can help those with an international presence expand their footprint in China and allow local firms to access the global market.”

He added that the cost of labour in China is more competitive than many other markets, particularly in the US and Europe, and therefore quant firms operating in Shanghai often benefit from having R&D hubs in other parts of the country. Tsu argued that Chinese firms are still trying to catch up with the sophisticated kind of trading technology available to their counterparts in the US – such as AI-power algorithmic trading – but that the human resources available in China mean they are making rapid advances.

Tsu and Yu also pointed out that Shanghai is the best place to gain exposure to Chinese markets which, despite the fraught economic climate of recent years, remains of increasing interest to international investors. “In Asia you have other financial hubs, such as Hong Kong, Tokyo, or Singapore, but the problem with those three is that you are not in China itself,” Yu said. “If you’re wanting to focus on the China market and want to be best placed to take the opportunities associated with that market, you need to be in Shanghai.”

Tsu noted that Shanghai could also be set to benefit from global macroeconomic trends, and in particular the stability offered by the Chinese government’s approach to handling the economy. In his view, the extreme volatility over the past couple of years has demonstrated the extent to which other markets, such as London and New York, are exposed to external events which they cannot control. The steep rise in oil prices caused by the sanctioning of Russian goods, for example, sent shockwaves through markets as traders had to grapple with higher inflation and a new political and economic order in Europe. These are conditions which, Tsu believes, China is not as exposed to.

“China is still running its own system, in terms of the macroeconomy,” Tsu said. “Most other major economies have to try and mitigate against disasters; their stock and bond markets tend to have problems as a result. China’s system, by contrast, is heavily controlled – and is therefore less impacted by global macroeconomic disasters. We don’t have to worry about energy prices rises, or those kinds of things; the market is more controlled and therefore in some senses safer.”

The quant space in Shanghai remains nascent and – as the recent CRSC movements have shown – far from full maturity. The question as to whether the city’s market could grow further and faster is, in many ways, bound up with the wider question of whether Beijing will seek to integrate into the global economic order, which would entail liberalising its financial markets and encouraging the growth of quantitative finance, or turn in on itself. Only time will tell the extent to which the “quant wolves” are coming to Shanghai…

Author: Harry Clynch

#Shanghai #China #Quants #Regulation #Asia

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