Citadel account frozen by Chinese exchanges over algorithmic
Source: Ken Griffin
Citadel is being probed for spoofing, a practice that involves placing then cancelling orders to shift prices.
Citadel Securities, the trading firm started by Ken Griffin, owns one of the 38 accounts frozen by Chinese exchanges as authorities investigate whether algorithmic traders are disrupting the nation’s stock market.
Bourses in Shanghai and Shenzhen have increased the number of suspended accounts from 24 announced on Friday, according to their websites. The probe is focused on spoofing, a practice that involves placing then canceling orders to move prices. Owners of the other frozen accounts include Infore Capital, a Shenzhen-based asset management company, and YRD Investment Co., a Beijing-based hedge fund.
China’s investigation of spoofing is part of the government’s unprecedented effort to shore up investor confidence after a $4 trillion stock-market rout. As the Shanghai Composite Index’s record-long boom went bust in June, investors faced the world’s highest volatility as well as trading halts that at one point froze half the companies on Chinese exchanges.
"In the Chinese market, quantitative investment is something very new―with investors and regulators needing some time to understand each other," said Gerry Alfonso, a sales trader at Shenwan Hongyuan Group Co., China’s third-largest brokerage by market value. "Some of those quant funds provide considerable liquidity to the market. As long they don’t increase the volatility of the stock, they are likely to be welcomed by regulators."
Funds frozen
China has been trying to increase the proportion of sophisticated investors in a market where individuals account for more than 80% of volume. While the country has relaxed curbs on international money managers through programs like the Shanghai-Hong Kong exchange link, critics have blamed the government’s market meddling for spurring foreign outflows in July.
The nation’s domestic shares were left out of MSCI Inc.’s global indexes in June amid concerns over capital controls, trading restrictions and the legal status of shareholdings in the country.
Spoofing entered the popular lexicon this year after U.S. prosecutors said a London trader’s use of the strategy contributed to the flash crash in May 2010, when American equities briefly lost almost $1 trillion of value. The practice involves feigning interest in buying or selling at a certain price, creating the illusion of demand in an attempt to move the market. The spoofer cancels the original order and buys or sells at the new price to make a profit.
Infore Capital
Citadel Securities confirmed that one of the accounts under the name of Citadel (Shanghai) Trading Ltd. was suspended by the Shenzhen exchange.
"We continue to otherwise operate normally from our offices, and we continue to comply with all local laws and regulations," the firm said in an e-mailed statement.
Mr. Griffin, whose net worth of $6.2 billion ranks 231st on the Bloomberg Billionaires Index, founded the precursor to his investment firm Citadel LLC more than two decades ago. He has since branched out into market making and execution services through Citadel Securities.
Infore Capital had trading accounts of four funds suspended from July 31 to Oct. 30 and is "actively working with the regulators to investigate and verify the trading strategies," the firm, which oversees about 5 billion yuan ($805 million) said in a statement on its website. He Jianfeng, the chairman of Infore Capital, serves on the boards of Chinese appliance maker Midea Group Co. and Zhejiang Shangfeng Industrial Holdings Co., a maker of fans.
Trading halts
Two of YRD’s funds have been suspended. The company, which oversees about 11 billion yuan, said it will seek to have the bans lifted as soon as possible and is preparing to brief regulators.
YRD said it withdrew orders for stocks that had fallen by the 10% trading limit during the July 8 trading session, and didn’t intentionally manipulate the market. It said trading that day was extreme and orders by YRD funds were "mechanically carried out."
The Shanghai Composite declined 5.9% on July 8 as more than 700 mainland stocks fell by the daily limit, according to data compiled by Bloomberg.The gauge dropped 1.1% on Monday, bringing its decline from a June 12 high to 30%.
Unpredictable markets
The Shanghai exchange also warned another five accounts for abnormal trading, the bourse said on its microblog today.
While spoofing may have contributed to recent declines in Chinese stocks, the main driver was probably a pullback by leveraged investors, Zhang Haidong, the chief strategist at Jinkuang Investment Management in Shanghai, said on July 31. Outstanding margin debt on mainland bourses has tumbled about 40% since mid-June.
Apart from the investigation into spoofing, regulators are probing "malicious" short selling and have examined the futures trading accounts of foreign investors. They’ve also banned stock sales by major shareholders and compelled state-run institutions to support the market with equity purchases.
China’s investigation will make algorithmic trading firms more cautious about entering the nation’s markets, according to Daniel Weinberg, a senior partner at high-frequency trader Optiver in Sydney.
"It’s very unpredictable what is going to happen next," said Mr. Weinberg, whose firm trades commodities in China. "You just have to make sure that you’ve got the right infrastructure and right people in the right place to be managing those things."
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