Futures exchanges have made preliminary plans to add latency to any servers that connect from third-party computer rooms, which could impact global firms’ high-frequency trading in certain markets.
China is pulling the plug on a key advantage held by high-frequency traders, removing servers dedicated to those firms out of local exchanges’ data centers, according to people familiar with the matter.
Commodities futures exchanges in Shanghai and Guangzhou are among those that have ordered local brokers to shift servers for their clients out of data centers run by the bourses, according to the people, who said the move was led by regulators. The change doesn’t only affect high-frequency firms but they are likely to feel the biggest impact. The Shanghai Futures Exchange has told brokers they need to get equipment for high-speed clients out by the end of next month, while other clients need to do so by April 30, the people said.
The clampdown will hit China’s army of domestic high-frequency firms but will also impact a swathe of global firms that are active in the country. Citadel Securities, Jane Street Group and Jump Trading are among the foreign firms whose access to servers is being affected, the people said, declining to be named as the matter is private.
The changes threaten a speed advantage that high-frequency traders, made famous by Michael Lewis’ bestseller Flash Boys, and quant hedge funds have long used to beat rivals. By using servers located in the exchanges’ own data centers, these firms can get slightly quicker execution than others — an edge in markets where every millisecond counts.
Trading firms don’t directly place their servers within the exchanges but they can do so with the help of local brokerages, who offer the service as a way of securing business. Some Chinese brokers are shifting high-frequency clients’ servers out of the Shenzhen Stock Exchange’s data centers, one person said.
Representatives for China’s securities regulator and Citadel Securities didn’t respond to requests for comment. Jane Street and Jump declined to comment.
Read more about China trading: Chinese Stocks Fall After Exchanges Tighten Margin RequirementsChina Weighs Tenfold Fee Increase on High-Frequency TradersChina Quants Defend Sector Amid Calls to Ban Algorithmic Trades
The move is the latest sign that officials are focused on leveling the playing field for investors and ensuring market stability after stocks rallied to multi-year highs this month. Regulators tightened rules on margin trading earlier this week in a bid to cool leveraged bets. They have also scrutinized some ETF trades by foreign market makers.
Two Milliseconds
Futures exchanges have made preliminary plans to add two milliseconds of latency to any servers that connect from third-party computer rooms, two of the people said. It’s not clear if other exchanges are considering the same approach.
The delay will be in addition to the time lag trading firms experience from moving servers away from exchanges, the people said.
A delay of just a few milliseconds would be imperceptible to most investors but it could be enough to impact global firms’ high-frequency trading in stock index futures, convertible bonds and commodities. Some of their trading strategies may not be viable without the fastest access, though it’s unclear how the firms might adapt as they try to stay a step ahead of rivals.
It’s unclear whether the timing and details of the changes will apply uniformly across brokers and exchanges.
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Chinese quants had assets under management of around 1.7 trillion yuan ($244 billion) by June, according to estimates by Citic Securities Co., a local investment bank. But global giants like Tower Research Capital, Jump and Optiver Holding BV have regularly managed to beat local players, especially in the futures market, according to the people. Optiver declined to comment. Tower didn’t respond to requests for comment.
China’s stock exchanges define high-frequency trading as more than 300 orders and cancellations per second through one account or more than 20,000 requests in a single day. Such accounts dropped 20% in 2024 to about 1,600 as of June 30 that year, the China Securities Regulatory Commission has said.
The attempt to shift high-frequency traders away from exchanges comes after Beijing’s years of unease with these firms, who add liquidity to markets but also enjoy execution advantages that are unthinkable for mom-and-pop investors.
Two years ago, regulators imposed tighter rules on automated stock trading. Officials have also threatened to raise fees on high-frequency traders, although so far they haven’t done so.
Officials elsewhere have also made moves to curb the advantages of high-speed traders. Last year, Thailand’s stock exchange said it would tighten rules on high-frequency trading, part of a wider move to restore market confidence.
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