Citadel Securities, a Chinese branch of high frequency hedge fund Citadel LLC, has had its account frozen by the China Securities Regulatory Commission (“CSRC”) as officials investigate whether algorithmic, automated trading is causing China’s stock market to decline.
In the latest attempt to stabilize and “clean up” the country’s tumultuous stock market, it has banned Citadel Securities from trading on both the Shanghai and Shenzhen stock exchanges, raising fresh questions about just how useful high frequency trading operations are for markets and retail investors.
The move to ban certain companies from trading on Chinese stock markets is just one element of the country’s unprecedented plan to shore up stock prices and grow investor confidence. China’s head authorities stepped in after the country suffered a $4 trillion plummet in the markets in July and August. The rout followed a 12-month period of stock growth which ended June 12th. The Chinese government took extraordinary efforts to halt the crash, including large-scale purchases of shares by state-owned banks and banning stock sales by major shareholders.
The latest ban on companies is directly related to the SCRC’s investigation into the practice known as “spoofing.” Spoofing occurs when a buyer purchases or sells stock, but then withdraws the order before the sale is completed. The investor then purchases or sells the stock at the new price to make a profit. This practice can mislead investors by creating a false impression that a certain stock is trading at a certain price. Some investors claim that is very common to withdraw buy/sell orders if market conditions change between the time an order is placed and when it is finalized. Despite these claims, the SCRC is having none of it.
In addition to researching spoofing practices, the SCRC is also aggressively investigating “malicious” short selling and other various forms of market manipulation, which authorities state are partly to blame for the market’s recent volatility.
Citadel has declined to specify details on its trading practices that led to its suspension, but it did confirm the ban and stated that it “continue[s] to otherwise operate normally from [their] offices, and [they] continue to comply with all local laws and regulations.”