China is considering a fee hike of at least tenfold on high-frequency trading, its latest attempt to rein in some quantitative strategies deemed by regulators as a threat to fairness in the nation’s retail investor-dominated stock market.

The China Securities Regulatory Commission and the country’s stock exchanges have consulted some market participants on draft plans to raise a 0.1 yuan (1.4 cents or 6.5 sen) fee on buy and sell orders to at least one yuan if the transactions meet the threshold of high-frequency trading, according to people familiar with the matter, who requested not to be named as the discussions were private.

Regulators also floated the possibility of granting exemptions if an account’s monthly turnover rate is lower than four times its total holdings, a level that would help avoid unwanted impact on mutual funds that also use computer programs to generate automated trades, the people said. Revisions are still being made and the final version could be subject to change, they added.

The proposals follow up on new rules earlier this year for programmed transactions, with officials pledging to slow high-frequency trading by raising costs. A significant hike in fees will further dent the returns of some quantitative hedge funds, which are already reeling from crackdowns that include stringent curbs on short selling earlier this year.

The CSRC didn’t immediately respond to a request seeking comment.

Programmed trading accounts for about 29% of China’s stock market turnover and such investors hold about 5% of the domestic A shares, according to the CSRC.

While programmed trading can improve market liquidity, it gives traders “obvious” advantages in technology, information and speed over smaller investors and could amplify volatility at certain points, the CSRC told reporters at a briefing in April. Officials have imposed additional reporting requirements on high-frequency traders and pledged to raise fees to curb their “excessive advantages” and maintain market fairness.

The country’s top quant funds have defended the industry by publishing rare articles this month in response to “misconceptions” about the sector.

China’s stock exchanges have defined 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 have dropped 20% this year to about 1,600 as of June 30, the CSRC has said.

The proposal suggests that once an order is identified as “high-frequency,” exchanges can raise the 0.1 yuan fee to at least one yuan, the people said. The fee on cancelled trades will be lifted from 0.1 yuan to five yuan, they said.

China’s 1.6 trillion yuan quant hedge fund industry is facing growing headwinds this year amid a falling stock market, with some researchers stepping up calls in recent days to ban algorithmic trades outright. A top-performing hedge fund was banned in February from opening stock index futures positions for 12 months after it used high-frequency trading to circumvent transaction limits.

High-frequency trading accounts for a small proportion of quants’ combined assets under management, and such strategies’ share will only fall further amid tightened supervision, Zhejiang High-Flyer Asset Management, one of the largest quants, wrote on its Wechat account last week. Quants trading A shares on the mainland typically replace the entire holdings every one to three weeks, which amounts to an annual turnover of 35 times to 105 times, it said.

More than 100 mutual fund firms also manage quant funds, with Fullgoal Fund Management Co running more than 30 billion yuan of such products as of Sept 30, according to a Haitong Securities Co report in December. They often face more trading restrictions compared with hedge fund rivals, stricter risk control and significantly higher trading costs, the report said.

China’s commodities exchanges earlier ended rebates paid on some automated trades, which would already have had an impact on high-frequency trading in that market, Bloomberg reported in January.

  - Bloomberg