Establishment of Program Trading Reporting System and Regulatory Arrangements to Promote Regulated Development of Program Trading
On September 1, 2023, the Shanghai Stock Exchange (SSE) issued the Notice on Matters Related to Stock Program Trading Reporting (hereinafter referred to as the Reporting Notice) and the Notice on Matters Related to Strengthening Management of Program Trading (hereinafter referred to as the Management Notice), expanding the program trading reporting system from convertible bonds to stocks, funds, and other product categories for trading. This further improves the management of program trading behavior in the securities market to promote stable and healthy development of the market. The Reporting Notice and Management Notice will be implemented simultaneously starting from October 9, 2023. This initiative by the SSE is in line with the requirements of the new Securities Law, responds to market demands, and deepens institutional innovation in key areas, contributing to enhancing market transparency and promoting the normative development of program trading.
In recent years, program trading of stocks has become increasingly active on the SSE, with trading volume continuously rising and market influence growing. In 2020, the new Securities Law was officially implemented, requiring investors engaged in program trading to report to stock exchanges. Under the overall guidance of the China Securities Regulatory Commission (CSRC), the SSE, adapting to the new situation, new tasks, and new requirements of market development, released the Notice on Matters Related to Program Trading Reporting for Convertible Corporate Bonds in 2021, implementing the program trading reporting system in the convertible bond field as a pilot. Since the implementation of the reporting system, the reporting of program trading in convertible bonds has progressed steadily, with active cooperation from relevant parties and initial effectiveness of system operation, providing a beneficial foundation for promoting similar practices and experiences in stocks, funds, and other product categories for trading. In 2023, seizing the opportunity to fully implement the stock issuance registration system, the SSE revised the Trading Rules of the Shanghai Stock Exchange, aligning it with the new Securities Law and clarifying the reporting obligations of program trading investors.
On this occasion, the SSE thoroughly summarized the practical experience in managing program trading in convertible bonds, conducted extensive research on the A-share market, carefully listened to opinions and suggestions from all parties, and drew upon beneficial practices in managing program trading in mature overseas markets. With the establishment of the information reporting system as the starting point, the SSE established the program trading reporting system for the stock market and corresponding regulatory arrangements, further clarifying the scope of program trading and market expectations for regulatory oversight.
The Reporting Notice defines the specific requirements for reporting program trading on the SSE.
First, clarifying the reporting entities. The definition of program trading is specified, and the scope of reporting entities is determined accordingly, including clients of members, members engaged in proprietary trading, market-making, asset management, and other businesses, investment institutions such as fund management companies and insurance institutions conducting trading through exchange trading units, as well as other program trading investors identified by the SSE.
Second, specifying the reporting methods and time limits. Members' clients should report to the member that accepts their trading orders, and the member should promptly confirm the received report and report it to the SSE within 5 trading days. Members and other institutions using trading units should report to the SSE prior to commencing stock program trading for the first time.
Third, stipulating the information to be reported. This includes basic account information, account fund information, trading information, trading software information, etc.
Fourth, strengthening the management of high-frequency trading. For investors whose highest order submission rate or highest number of daily order sumbissions reach a certain threshold, additional reporting is required on topics such as the location of the program trading system servers, system testing reports, and contingency plans in case of system failures. Differentiated arrangements are also made for split order algorithms adopted by certain institutional investors to reduce market impact from large orders or to ensure trading fairness for various portfolios.
Fifth, clarifying the responsibilities of members. Members are required to establish internal management systems and processes for program trading reporting. They should sign additional agreements with clients, stipulating the rights and obligations of both parties related to program trading matters. Members are also required to verify clients' reports thoroughly, to strengthen program trading monitoring, and to effectively carry out relevant work of stock program trading reporting.
Sixth, defining the regulatory requirements. The SSE will conduct regular data screening and compare reported information against actual trading behavior. Investors with incomplete or inconsistent information in their reports, or those who fail to report as required, will be reminded and may face disciplinary measures depending on the situation. Regulatory measures or disciplinary actions will be taken in accordance with the self-regulatory rules in cases where obligations to report are not fulfilled before engaging in program trading, where the reported information does not comply with the requirements stated in the Reporting Notice, or when members fail to fulfill their reporting management responsibilities as prescribed.
Seventh, determining the scope of application of the reporting system. Investors engaged in program trading on the SSE fund market and depository receipt market are required to fulfill reporting obligations accordingly.
Overall, the Management Notice aims to strengthen the management of program trading and complement the Reporting Notice to serve as a foundational arrangement for program trading supervision. The main contents include:
First, further clarifying the responsibilities of members for program trading management. Members are required to enhance the management of their own and their clients' program trading behavior. Members may refuse program trading instructions or revoke related order submissions that may affect the safety of the SSE's trading system or normal trading order.
Second, specifying the key monitoring matters for program trading. The SSE has listed key monitoring matters for program trading investors, including abnormal trading behavior, high-frequency trading behavior, and situations where program trading participates significantly during periods of obvious abnormality in the prices or trading volumes of multiple securities.
Third, clarifying that the SSE can put forward differentiated management requirements for high-frequency trading. Specifically, this includes adjusting the criteria for determining abnormal trading and increasing reporting contents.
Fourth, specifying regulatory requirements. The SSE may conduct on-site or off-site inspections of entities involved in program trading based on self-regulatory management needs. If any violations are discovered, regulatory measures or disciplinary actions may be taken. If entities are involved in abnormal trading behavior, or violate the SSE's program trading reporting requirements, or violate the requirements of the Management Notice on program trading, or exhibit other violations stipulated in the Management Notice, the SSE may take regulatory measures or disciplinary actions.
Moving forward, the SSE will adhere to the general principle of seeking progress while maintaining stability, follow the unified arrangement of the CSRC, continue to enhance foundational regulatory arrangements and ensure that all market participants strictly comply with the program trading reporting system and relevant regulatory requirements. Additionally, the SSE will strengthen market surveillance to protect investors' legitimate rights and interests, and to effectively maintain a sound and healthy market order and ecosystem.
Notice on Matters Related to Strengthening Management of Program Trading
Notice on Matters Related to Stock Program Trading Reporting