China seeks to expel high frequency "spoof" traders

The Shanghai Composite index recently plummeted 35 per cent off the back of a seven-year high that it hit on the 12th of June 2015. The fall has prompted the Chinese government and state-sponsored financial institutions to support the exchange with trillions in public funds being used to buy shares. These measures have brought the index 8.6 per cent up from its lowest point, which it reached on the 9th of July, but this is still around 29 per cent below its seven-year peak. 

As investigations continue into the recent market turmoil, the China Securities Regulatory Commission (CSRC) has turned its sights towards short sellers. Algorithmic trading, which can often "amplify gains and losses" according to the CSRC, is falling under increased scrutiny. Trading was suspended on 24 securities accounts on the Shanghai and Shenzhen stock exchanges, accounts which the regulator said had "influenced securities prices or investor decisions."

The practise known as "spoofing" is thought to at the root of these developments. The term refers to investors who submit a buy or sell order, only to retract it before it has been finalised. In doing so the trader can create the appearance of the stock trading at a certain price and the illicit tactic can be used to manipulate the marketplace. 

Zhang Qi, Equity Strategist at Haitong Securities, said: " Creating a false impression in order to make other people buy in - that is exactly what they're looking at now. They've investigated this before as well. If you have extra time or extra funds, you can gain an advantage." 

The market is now being buttressed by a collection of state-owned financial institutions, and this has created openings of late for malicious traders who use spoofing to get ahead. 

Of the accounts suspended recently, four were being opened at the Beijing HQ of Citic Securities, which is China's largest brokerage firm (by assets). Another source of big trades was found to be the state-owned China Securities Finance Corp, which was made the main avenue for directing state funds into the stock market. 

Analysts fear that by placing large orders through this branch, unscrupulous traders could hide behind the smokescreen of the government sponsored institutions buying a particular stock. The resultant increase in investor interest would then push up prices.