Chinese stock markets have come under renewed pressure in recent days as Beijing intensifies its clampdown on high-frequency trading, a move that has rattled sentiment but reflects a deeper regulatory shift toward control and stability.
The Shanghai Composite Index fell about 2.1% from its recent peak of 4,188 at midday on January 14 to close at 4,101 on January 16. Over the same period, the Shenzhen Component Index slipped 1.2% from 14,449 to 14,281, while the CSI 500 Index dropped 1.5% from 8,360 to 8,232.
Commodities futures exchanges in Shanghai and Guangzhou have instructed brokers to relocate client servers away from exchange-operated data centers, a step that removes the ultra-low-latency access on which high-frequency trading strategies depend, Bloomberg reported.
While the changes apply to all market participants, high-frequency traders are expected to bear the brunt of the impact. The Shanghai Futures Exchange has set staggered deadlines for server relocation, requiring equipment used by high-speed trading clients to be removed by the end of February, with other clients given until April 30, according to the report, which cited people familiar with the matter.
In addition, some futures exchanges have drawn up preliminary plans to impose an extra two milliseconds of latency on connections routed through third-party data centers, the people said. Any such delay would be layered on top of the additional lag firms already face from relocating servers away from exchanges, further diluting the speed advantages enjoyed by high-frequency traders.
The clampdown is set to hit China’s large domestic high-frequency trading sector but will also affect a range of foreign firms active in the market. Global market-making groups, including Citadel Securities, Jane Street Group and Jump Trading, are reportedly among those whose access to exchange-linked servers is being curtailed.
Data from the China Securities Regulatory Commission (CSRC) showed that the number of high-frequency trading accounts declined by around 20% in 2024 to about 1,600 as of June 30 last year, reflecting regulators’ long-standing discomfort with trading practices that provide liquidity but grant execution advantages far beyond the reach of most retail investors.
300 orders per second
China’s stock exchanges classify high-frequency trading as activity involving more than 300 orders or cancellations per second through a single account, or over 20,000 order requests in a day.
“Defining anything below 300 transactions per second as ‘legal’ has no theoretical or practical grounds,” Lin Yixiang, chairman of Tianxiang Investment Advisory and an economist, said at the 2025 Weibo Finance Night event on January 15.
“Before machine trading, a human trader doing three transactions a second would already be impressive. But letting machines do hundreds is something entirely different,” he said. “Frequent order submission and withdrawal can create fake volumes and distorted prices, seriously disrupting market order.”
In a market dominated by retail investors with high savings rates, he added, repeated losses borne by households alongside hefty management fees collected by institutions had eroded trust.
He said curbing such activity would be “an answer to retail investors and a reflection of a people-centered approach to capital market governance.”
“In China, millions of retail traders are using similar technical logic to value and trade stocks,” says a Yunnan-based columnist writing under the pen name “Big Tree.” “They have long been treated by high-frequency systems as prey.”
“After a stock drifts lower for several days, a sudden large buy order can briefly push prices sharply higher and break key technical levels, prompting retail traders to rush in,” he writes. “Yet the order may last only oneminute before being withdrawn. Prices then slump as coordinated sell orders appear, leaving dozens of retail investors incurring losses of more than 5%.”
‘After a stock drifts lower for several days, a sudden large buy order can briefly push prices sharply higher and break key technical levels, prompting retail traders to rush in. Yet the order may last only one minute before being withdrawn. Prices then slump as coordinated sell orders appear, leaving dozens of retail investors incurring losses of more than 5%.’
Yunnan-based columnist ‘big tree’
He says that, with artificial intelligence now embedded in many high-frequency systems, algorithms are increasingly able to harvest sentiment directly from online forums and social media.
“When phrases like ‘all-in’ or ‘target price doubled’ flood discussion boards, the system reads that as extreme retail excitement and preys on retail traders,” he says, adding that headlines such as “China will boost chip self-sufficiency” are powerful triggers of these activities.
Margin financing rules
Apart from curbing high-frequency trading, the CSRC also tightened margin financing rules to reduce risks in stock trading.
On January 14, the Shanghai, Shenzhen and Beijing stock exchanges said they would raise the minimum margin requirement for new margin-financing trades to 100% from 80%.
Effective from January 19, the adjustment marks a reversal of a 2023 easing, when the ratio was cut from 100% to 80% after having been raised to full coverage in 2015. It applies only to newly opened margin-financing contracts, while existing positions and any extensions will remain subject to the previous requirements.
Before the adjustment, an investor with 1 million yuan (US$143,350) in capital could borrow up to 1.25 million yuan from a brokerage, giving a total purchasing power of 2.25 million yuan. With the margin ratio raised to full coverage, that figure now falls to 2 million yuan.
A Hunan Daily columnist writing under the pseudonym “Kancaijun” likened China’s equity market to a pot of hotpot, arguing that margin rules are adjusted to regulate market temperature.
“When the market turns cold and liquidity dries up, regulators add fuel by cutting margin requirements to warm things up,” she says. “That was the logic behind lowering the ratio from 100% to 80% in August 2023.”
“When the pot starts boiling over with overheated trading and rising leverage risks, regulators raise margin requirements, tightening new leverage to cool the market and prevent spillovers,” she says.
Last April, after United States President Donald Trump initiated a tariff war against China, the Dow Jones Index (DJI) fell to 37,645 on April 8, while the Shanghai Composite Index dropped to 3,096 on April 7. But since both sides de-escalated the situation, the DJI has risen 31% to about 49,430 as of now, while the Shanghai Composite Index has gained 32%.
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Follow Jeff Pao on Twitter at @jeffpao3
