Within a radius of 3 kilometers from the New York Stock Exchange, there are investment institutions of different sizes and types stationed. It is their daily duty to strive for millisecond transaction speed. There is a similar institutional layout around the Shanghai and Shenzhen Stock Exchange on the other side of the ocean. Among them, some institutions also intended to “fight for speed” have a common “label” – quantitative trading institutions.
“Quantitative trading takes advantage of absolute capital advantages and absolute high-tech advantages to compete with individual investors and disrupt the A-share market, which should be prohibited.” “it’s not that retail investors can’t afford to lose, but that they are afraid of being maliciously manipulated by quantitative trading, and the loss is unclear”
After several ups and downs, make complaints about quantified trading are still full of interactive platforms for major investors. Even professionals have not reached a consensus on the definition of quantitative transaction impact.
Today, the scale of quantitative trading management has reached trillion yuan, which is regarded as one of the most influential trading methods in the A-share market. However, its complex construction process makes many market participants stay at the simple cognitive level and still unable to accurately identify and assess risks. In this regard, the reporter of Securities Daily interviewed and investigated the operators and researchers of quantitative transactions such as securities companies, public offering, private placement and futures companies, as well as individual investors and quantitative counterparties, in order to present a multi-dimensional mirror of quantitative transactions through the interweaving of the statements of “positive and negative debaters”.
quantitative transactions under the cloak of “mystery”
Some people say that there are three insurmountable peaks in the investment community, among which quantitative trading is the most mysterious. This sense of mystery stems from the fact that the investment strategy itself is difficult to summarize, and also because it has not existed in the A-share market for a long time, and the cognition of relevant practitioners is still shallow.
In a broad sense, quantitative trading is an investment method based on historical data, with mathematical model as the core and procedural trading as the means, which can automatically identify investment opportunities and trigger transactions. The first recorded quantitative transaction in the Chinese market occurred in sunshine quantitative private placement in 2006. At present, China’s quantitative trading mainly has two investment strategies, namely index enhancement strategy and neutral strategy. Index enhancement strategy refers to the excess return obtained by quantitative means with 500 constituent stocks of China Securities Index as the target, that is, the so-called alpha return; The neutral strategy is to hedge the stock index futures with the corresponding position funds while holding the stock to obtain the spread income.
Up to now, quantitative trading operators have generally adopted the index enhancement strategy. This is mainly due to the great limitations of the neutral strategy of quantitative trading in the past 16 years. In 2010, the listing of CSI 300 stock index futures provided room for the neutral strategy of quantitative trading. However, after the abnormal fluctuation of the A-share market in 2015, most quantitative trading operators turned to the index enhancement strategy for various reasons.
A senior quantitative fund manager of a public offering in Beijing said, “considering the factors such as liquidity, valuation and turnover rate, the stock selection of quantitative trading is currently concentrated in the relevant stocks of the China Securities 500 index.”
Although the operating rules of quantitative trading have been well known in the industry, some securities practitioners still sigh, “we can’t win quantitative trading. We can’t do it manually because there is top team cooperation behind it.”
This emotion actually represents the voice of many subjective investors. Behind quantitative trading is to observe and understand the market through mathematical indicators. Generally speaking, it is “machine investment without emotion”. Lu Zhengzhe, CEO of magic square quantification, told reporters that quantitative trading uses mathematics, statistics and artificial intelligence to replace manual decision-making and invest in the secondary market. Generally, the processes of market research, fundamental analysis, stock selection, timing and order placement can be completed automatically by computer.
“The essence of quantitative trading is to explore the law of asset price rise and fall through mathematical models.” China Securities Co.Ltd(601066) intelligent quantitative strategy chief analyst Xu Jianhua told the reporter of Securities Daily that quantitative trading is mainly based on volume price trend, supplemented by fundamental analysis, and uses computer technology and cutting-edge mathematical optimization models to select probability events that can bring excess return in big data to formulate strategies.
For the arbitrage logic of quantitative trading, Lou Huafeng, director of the diversified investment team of the equity investment department of Societe Generale fund, believes that arbitrage trading generally refers to the same financial product with inconsistent transaction prices in different markets. By buying low and selling high, wait for the price to converge, and the transaction will be triggered when the price difference exceeds the transaction cost.
It is not difficult to understand why many quantitative investment talents in China come from “code farmers”. In the eyes of human resources practitioners, China’s quantitative investment environment pays more attention to the educational background of candidates and the accumulation of relevant professional skills, such as statistics, advanced mathematics and program code engineering. The frontier quantitative investment institutions also attach great importance to the relevant background of the direction of artificial intelligence.
In recent years, the development of innovative technologies represented by big data, cloud computing and artificial intelligence has promoted the continuous evolution and upgrading of the transaction mode in the financial market, superimposed the rapid growth of the wealth management demand of market participants, and ushered in the “increase in volume” of quantitative transactions Liu Fang, chief portfolio allocation analyst of Citic Securities Company Limited(600030) research department, estimated that by the end of last year, the management scale of quantitative private placement had been close to 1 trillion yuan, while the management scale of quantitative public offering had reached 300 billion yuan.
how to evaluate the influence of “new species”
Yuan Yuwei, a macro hedge fund manager, believes that compared with the scale of overseas mature markets, quantitative trading is still a “new species” for the A-share market, which is in the early and medium-term stage of development as a whole.
Due to less “communication” between quantitative trading and the outside world, the negative public opinion gradually became serious. Around September last year, the trading volume of A-share market increased significantly, pushing quantitative trading to the forefront of the storm. At that time, many voices in the market pointed the source of the turnover of the A-share market exceeding trillion yuan for 49 consecutive trading days to quantitative trading, and some people threw out the judgment that “quantitative trading accounts for 50% of the turnover of more than trillion yuan”.
So, what is the proportion of quantitative transactions? Wei Jianrong, assistant director of Kaiyuan Securities Research Institute and chief analyst of financial engineering, took quantitative private placement as an example, “According to the approximate scale of different types of quantitative strategies, the team calculated the annual turnover of quantitative transactions under different turnover scenarios. Under the neutral assumption, the annual turnover contributed by quantitative private placement is about 63 trillion yuan, that is, about 250 billion yuan per trading day. Therefore, the daily turnover of quantitative private placement accounts for about 20% of the whole market.” (the above statistical data do not quantify the public offering, because its contribution and impact on the total turnover are relatively limited).
Subsequently, due to the sharp withdrawal of the net value of most quantitative private placement products, the scale shrunk seriously, and the quantitative transaction was questioned again.
Some “opposing debaters” believe that head quantitative trading operators generally hold stocks with good liquidity, and their positions may be homogenized to some extent, which will put pressure on the market when various institutions reduce their positions, resulting in excessive withdrawal of the stock end.
Wei Jianrong, the “square debater”, explained that “in the extreme market of sharp switching between industry and style, the quantitative strategy may face phased failure. If the quantitative products are exposed in the corresponding industry and style, they may face large net value fluctuations.
”
Xiao Gang, former chairman of China Securities Regulatory Commission, believes that compared with the United States, China’s market has sufficient liquidity, high turnover rate and many natural person retail investors. If the quantification is allowed to be too large, it will be unfavorable to the market and unfair to retail investors. Therefore, for the Chinese market, quantitative transactions should be slightly limited.
Some scholars also believe that the essence of quantitative trading is “harvesting retail investors”. He Qiang, a member of the National Committee of the Chinese people’s Political Consultative Conference and professor of the school of finance of the Central University of Finance and economics, said that the large amount of price difference income obtained by quantifying short-term trading is the benefit obtained from tens of thousands of shareholders.
Wu Xuan, chief market analyst of deppon fund, told the Securities Daily, “quantitative investment has little impact on medium and long-term investors, but sometimes it does occupy the profit space of short-term funds.”
However, for the accusation of “quantitative trading ‘cutting leeks'”, the “positive debater” quantitative trading operation organization and researchers do not agree, saying that the excess return of quantitative trading mainly comes from the organization’s own stock selection ability.
Yuan Yuwei said that this is actually a problem related to “market fairness”, which is also a problem faced by all professional investors, and quantitative trading operators are no exception. Whether in the overseas market or A-share market, institutional investors have more advantages than individual investors. In addition to quantitative researchers for more professional analysis of various data, they also process information faster through investment in financial technology. Perhaps the market should focus on the fairness of trading rules rather than moral judgment of trading results.
Lou Huafeng admitted that both quantitative investment and subjective investment hope to overcome the market index and obtain excess returns. From the perspective of relative return, the victory of strategy over the market index inevitably means that some people lose the market, but we can not simply think that the investors who lose the market are “leeks”.
“Quantitative investment is not choosing a counterparty.” Yuan Yu, founder of Mingshi investment, explained that if other traders overreact to negative information and sell a large number of shares, making the share price lower than the reasonable price, the quantitative institution will buy them soon. To a large extent, quantitative investment is to buy stocks with excessive valuation deviation in the market.
For the explanation of “positive debater”, the “negative debater” also has some thoughts. Individual investor Dai Riyue (a pseudonym) said that quantitative investment, whether based on speed advantage or capital advantage, and even using special means to achieve implicit advantage to affect the market, is a serious negative externality to the market. It can neither find the price nor provide liquidity, but is equivalent to levying an additional “transaction tax”.
In addition, in the case of rising scale, if the turnover rate of quantitative trading is high and the strategy is homogeneous, whether it will lead to the rise and fall of the stock market has also aroused debate between the positive and negative sides.
According to the data of private placement network, at present, the capacity of 10 billion yuan private placement camp has been expanded to 118. Among them, there are 30 10 billion yuan quantitative private placement managers, accounting for 25.42%.
There are “anti debaters” individual investors believe that when the structural market of A-Shares is highlighted, the superposition of the above factors is difficult to avoid the violent fluctuation of the index.
Dai Riyue also said frankly that quantitative trading is easy to lead to stampede effect. In history, many “circuit breakers” in the United States have institutional chain stop loss factors. Many quantitative Private Equity Funds adopt the “all attack and all defense” strategy, either full or clear their positions. While “killing” is decisive, it will also increase market volatility.
“In the short term, a highly homogeneous quantitative strategy will help the impact of rising and falling.” An employee of a quantitative counterparty who asked not to be named said that if a large number of quantitative transaction operators adopt similar strategies and face the same investment targets, similar transaction signals may be sent between institutions. If there are too many operations in the same direction, excessive capital transactions will lead to market price deviation and exacerbate Market fluctuations, which will have an impact on the stock market in the short term.
However, the quantitative trading operators and researchers of the “square debater” explained that the impact of quantitative trading on the stock market is a misunderstanding. “In the medium and long term, quantitative trading will not increase market volatility.” Xu Jianhua, for example, said that the United States has more quantitative transactions or procedural transactions, but in the past 15 years, its market volatility has been lower than that of the A-share market for a long time, and the overall level is not high. It can be seen that the development of quantitative trading does not necessarily cause severe market fluctuations.
An unnamed quantitative trading researcher told reporters that if the strategies of multiple operators converge and the profit space of quantitative trading is not large, we can only “fight for speed”. Once institution a succeeds in trading first, the market situation may not meet the trading value set by institution B, resulting in its inability to complete the transaction and avoid the stampede effect.
Lou Huafeng said that quantitative trading is only a means of market research and investment, which has nothing to do with helping rise and fall. If we pursue the quantitative strategy of excess return, the position should be relatively stable. When we sell a batch of stocks, we will also buy a batch of stocks, and the impact on the market index is neutral. In addition, at present, most of the quantitative strategy funds issued in the market are index enhancement funds. These funds themselves are close to full positions. The positions will not be greatly adjusted due to the rise and fall of the market, nor will they help the rise and fall of the index.
strengthen supervision and crack down on “false quantification”
Although quantitative trading started late in China, supervision has long been put on the agenda. According to the communication between reporters and close regulators, the regulatory authorities will require quantitative institutions to set a reasonable threshold for risk control indicators. If the trading unit is found to have high-frequency trading tendency in the monitoring, a risk warning will be issued. Moreover, the new securities law also pays attention to procedural Trading: “if a procedural trading is carried out by automatically generating or issuing trading instructions through computer programs, it shall comply with the provisions of the securities regulatory authority under the State Council and report to the stock exchange, and shall not affect the system security or normal trading order of the stock exchange.”
When it comes to strengthening supervision of quantitative transactions. He Qiang said that in addition to the quantitative trading behavior of manipulating the market, generally quantitative trading does not involve violations of the law, but this does not mean fairness. Quantitative trading reaps a lot of benefits from retail investors, which is a great market injustice. Therefore, quantitative transactions must be standardized and supervision strengthened.
In fact, the regulators have also noticed these situations.
Yi Huiman, chairman of the CSRC, proposed in early September last year, “Quantitative trading and high-frequency trading are common in mature markets. While enhancing market liquidity and pricing efficiency, they are also prone to problems such as transaction convergence, increased volatility and violation of market fairness. In recent years, quantitative trading in China’s market has developed rapidly. What does the exchange think of the capital structure and new trading tools entering the market? I hope you can think about it.”
Then, in November last year, the China Fund Industry Association and the China Securities Industry Association respectively issued notices to some quantitative private equity fund managers and securities companies, requiring them to submit quantitative trading data information.
The above “positive and negative debaters” also put forward suggestions on establishing and improving the regulatory system of quantitative investment. At the same time, the “false quantification” existing in the market also expressed the willingness to increase punishment.
Xu Jianhua suggested that the regulatory authorities can help the quantitative industry to stabilize and grow from two aspects. “In terms of trading mechanism, for example, the single machine system under the monitoring and optimization of the stock exchange, and the malicious hanging order, fishing order and secret stock price operation in the process of call auction. For example, the quantitative strategy can manipulate hundreds of small cap stocks to prevent potential loopholes in the system from being exploited by quantitative tools. At the same time, the communication between the regulatory authorities and quantitative investment institutions can be strengthened, and the quantitative investment institutions can disclose certain investment strategy information to the regulatory authorities, such as turnover rate and withdrawal rate Single rate, etc., and explain and report the abnormal conditions. “
In the past, there were some illegal transactions of hot money in the name of quantification through procedural access. In the practice of quantification in overseas markets, there were also illegal transactions such as high-frequency transactions.
Therefore, a number of quantitative investors suggested that the regulatory authorities classify and identify procedural transactions to crack down on “false quantification” and other illegal transactions.
The above-mentioned people close to the regulator said that the core of quantitative investment supervision is frequency. “If institutions carry out high-frequency bill swiping transactions, it may indeed disturb the background system and market, or even have a certain impact, but the regulatory authorities cannot allow such high-frequency transactions.”
In fact, regulators are paying increasing attention to quantitative transactions. Another person close to the regulator disclosed to the reporter of Securities Daily that “we have always been paying close attention to the development of quantitative trading”.
why should we focus on quantitative transactions
Most investors are familiar with quantitative trading, but they are deeply confused.
In recent years, with the rapid rise of quantitative trading scale in the A-share market, relevant disputes have also followed. First, the sensational judgment that “quantitative transactions account for up to 50% of the trillion yuan turnover of a shares”, and then the rumor that “quantitative private placement of 50 million yuan year-end bonus” brushed the screen. In addition, the recent sharp withdrawal of quantitative fund net value was accused of aggravating market fluctuations. While the quantitative transactions with “black recruitment constitution” were frequently searched, it also prompted regulators, institutions and retail investors to focus on it.
Perhaps because the “money” situation is good, or because the cognitive threshold is high, or because the information is opaque, there has been a dispute over quantitative trading, and there is even a fierce exchange of views among heavyweights in the industry. Some people believe that it can increase the market trading volume, promote the activity of the stock market and help to form a reasonable price; However, there are also views that it is also easy to lead to transaction convergence, exacerbate market volatility, and violate market fairness.
As a professional reporter in the securities industry, in order to explore the background of quantitative trading, we have systematically combed and presented the views of the industry. However, because many works of quantitative trading are “non-standard”, this paper adopts an open “ending”, hoping to use the views of the “institutional debater” of the positive and negative sides to collide, in order to get a glimpse of the mystery of quantitative trading.
In the dialogue with relevant practitioners, we clearly feel that quantitative trading has become an “influential” institutional force, but it also faces the trouble of development, and is often labeled as “cutting leeks” and helping rise and fall.
When investors make complaints about the profits, the main way to quantify the profits is to “harvest”. However, some researchers hold different opinions and believe that the condemnation of quantitative trading may come more from the ignorance of investors and the opacity of trading data. The unknown generates fear, so when the market changes, quantitative trading is easy to be used as a “shield”.
For the dilemma of the development of quantitative trading, some practitioners admitted that the current ability of quantitative strategy is still in the primary model stage, and with the improvement of management scale, factor failure is common, including the limitations caused by backward technology and investment environment, which has a great impact on the stability of product performance.
In the process of combing online search, we found that the development of quantitative trading is not terrible. The terrible thing is that the development is disordered and misinterpreted.
Therefore, to quantify the impact of trading on the A-share market, we will not draw a conclusion for the time being. Instead, we hope to take this opportunity to remind all parties in the market whether the “new species” is worthy of acceptance and support depends on whether it is constructive for the long-term development of the capital market. At the same time, on the premise of rational treatment of “new species” by all parties in the market, we expect the regulatory authorities to further strengthen compliance guidance and strengthen the institutional fence for possible risks.
