China's stock market has once introduced a circuit breaker mechanism, which has long been proven unsuitable for China's stock market. Foreign practices have shown that in some cases, synchronized quantitative trading by computers can affect market liquidity, thereby triggering a "flash crash".

For this reason, the U.S. Securities and Exchange Commission decided to introduce a circuit breaker mechanism, which automatically suspends trading for a period of time when the price or index fluctuates beyond a certain range.

Previously, the Chicago Mercantile Exchange's interest rate futures once triggered a "circuit breaker" and suspended trading for 2 minutes. This was due to the triggering of the quantitative threshold in the regulatory mechanism.

It can be seen that quantitative trading, like the circuit breaker, is still not suitable for A-shares at least for now.

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As a trading model, quantitative trading accounts for 60-70% of the U.S. stock market, why has it become a harvester in A-shares? This is because the composition of investors in the two markets is different.

The U.S. stock market is mainly composed of institutional investors, including mutual funds, pension funds, asset management companies, etc., which account for more than 90% of the stock market. In other words, in the stock market, this game market, everyone's strength is consistent.

In layman's terms, everyone knows each other. The quantitative trading you have, I also have, and the operation is almost synchronized, and there is no one harvesting anyone.

1. What is quantitative investment?

Quantitative investment refers to the use of mathematical/statistical/artificial intelligence and other methods to replace human decision-making and invest in the secondary market. Generally, market research, fundamental analysis, stock selection, timing, order placement, etc., can be automatically completed by computers. The computer's analytical ability is often stronger than that of humans, and it is more emotionally stable, more objective in research, and more reliable in execution. Quantitative investment is not only reflected in the proceduralization of trading, but it is a systematic investment methodology. Of course, in addition to quantitative investment institutions, subjective investment institutions and individual investors can also execute their transactions through programmatic algorithms.2. Is quantitative investment the same as high-frequency trading?

High-frequency trading is a form of quantitative trading, but the vast majority of quantitative trading is not high-frequency trading. High-frequency trading relies on extremely fast trading execution speeds, including data acquisition, order generation, and order execution. These strategies often focus on the microstructure of the market in terms of model research, such as the depth and breadth of the order book, bid-ask spread, market impact cost, and other information. Generally speaking, the high-frequency arbitrage strategies and market-making trading strategies we talk about belong to this type of trading; in the trading execution phase, to reduce price impact and lower trading costs, refined order splitting and dynamic hanging and cancellation orders are applied, some of which are also considered high-frequency trading.

Currently, most of the funds in A-share quantitative strategies are a combination of short, medium, and long cycles. Overall, quantitative trading is about changing positions every 1 to 3 weeks (corresponding to an annual turnover of 35 to 105 times on both sides); but if we exclude the part that provides short-term liquidity (the proportion of funds is not high, but the proportion of trading volume is high), the turnover rate of most funds is relatively low. Quantitative investment always faces a natural law: as the scale increases, the trading turnover naturally decreases.

Domestic regulators define high-frequency trading as transactions where the investor's trading behavior has a maximum number of declarations and cancellations per second for a single account reaching more than 300; and the maximum number of declarations and cancellations per day reaching more than 20,000. Under this standard, the proportion of funds using high-frequency strategies in the overall AUM of quantitative investment is not high. At the same time, with the strengthening of high-frequency trading regulation, the proportion of high-frequency strategies in quantitative investment will further decrease in the future.

The harm of quantitative trading to the trading market mainly includes the following points:

The market participation of funds is becoming more institutionalized, that is, de-individualized.

Market volatility will intensify and become more extreme.

Making money will become increasingly difficult.

High-frequency quantitative trading will disrupt the normal trading order of the market, damage the interests of other investors, and violate the principles of market fairness.

The essence of high-frequency quantitative trading is ultra-short-term speculation, which is not only inconsistent with the concept of value investment, rational investment, and long-term investment advocated by regulatory authorities, but also easily triggers market fluctuations, amplifying the investment risks of the market.Once high-frequency quantitative trading exhibits excessive trading scale and a convergence of trading directions, it may have serious negative impacts.

The harm of high-frequency trading to the trading market also includes the following points:

High-frequency trading behavior may disrupt the normal trading order of the market, harm the interests of other investors, and violate the principles of market fairness.

The essence of high-frequency quantitative trading is ultra-short-term speculation, which is inconsistent with the concept of value investment, rational investment, and long-term investment advocated by regulatory authorities. Moreover, it is prone to triggering market fluctuations and amplifying the investment risks in the market.

Once high-frequency quantitative trading exhibits excessive trading scale and a convergence of trading directions, it may have serious negative impacts.

1. Increased market volatility

Quantitative trading, through a large number of high-frequency transactions and complex algorithmic models, has a significant impact on market volatility. When the market experiences violent fluctuations, quantitative trading may exacerbate market panic, leading to a market crash. In addition, quantitative trading may also lead to excessive short-term reactions in the market, causing prices to deviate from their true value.

2. Market manipulation risk

Due to the high degree of automation and concealment of quantitative trading, some unscrupulous individuals may use this method to manipulate the market. For example, by writing specific algorithmic programs, they can quickly buy or sell a large number of stocks in a short period of time, thereby affecting the stock price trend to achieve the purpose of profit. This kind of market manipulation behavior seriously damages the fairness and justice of the market.

3. Impact on retail investorsQuantitative trading is typically closely associated with large institutional investors and high-frequency traders, while retail investors often find themselves at a disadvantage. Due to the lack of professional algorithmic models and trading techniques among retail investors, it is difficult for them to gain an advantage in a market dominated by quantitative trading. Moreover, the high-frequency trading behavior of quantitative trading can lead to significant price fluctuations in the market in an instant, exposing retail investors to higher trading risks.

IV. Increased Regulatory Challenges

The complexity and concealment of quantitative trading pose significant challenges for regulation. Regulatory authorities need to invest a considerable amount of manpower, material resources, and financial resources to monitor and prevent the risks that may arise from quantitative trading. However, existing regulatory methods and technologies find it difficult to fully cover and identify all quantitative trading behaviors, which undoubtedly increases the difficulty of regulation.

A-Share Trading Environment No Longer as Before

Why have quantitative funds, once at the forefront, now become the target of public criticism?

Tang Xiao, who specializes in researching speculative capital strategies, believes that the root cause lies in the significant change that the participation of quantitative funds has brought to the original ecology of the A-share market.

Taking the ultra-short line that Tang Xiao is familiar with as an example, generally speaking, a theme will go through the stages of initiation, confirmation, fermentation, acceleration, divergence, counter-encirclement, and dragon's head turning back, forming a complete theme cycle. Such a theme cycle is also the foundation for ultra-short line investors to operate.

In this process, different types of ultra-short line participants will choose the stages they are good at to participate in, such as some who like to explore themes, some who like to relay at high positions, and others who like to take the second wave opportunities of leading stocks. With the continuous relay of funds from all sides, a wave of the market can finally come out.

However, the increase in quantitative funds has made the familiar theme cycle different.

Quantitative Funds Devoured by Their Own ActionsThe challenge of balancing scale and performance has always been a major issue for quantitative funds. In recent years, many quantitative private equity funds with assets of tens of billions have had to choose to close their doors to new customers in order to protect the interests of existing clients. Examples include Huanfang Quantitative, Yanfu Investment, Qilin Investment, Jingu Quantitative, Evolution Theory Assets, and Tianyan Capital.

As the private equity industry has grown and developed, the homogenization of strategies among various quantitative private equity funds has become increasingly severe.

At the same time, market turnover has not significantly increased in recent years, with an average transaction volume of only 600 to 700 billion yuan during downturns, which greatly limits the overall market capacity for quantitative strategies.

Li Ming, the founder of a quantitative private equity firm in Shenzhen, said that quantitative private equity focuses on going with the trend and making money from market fluctuations. Once the transaction proportion exceeds a certain ratio, it becomes an important force affecting fluctuations, which goes against the original intention of quantitative trading.

Under this background, as one of the important participants in the A-share market, quantitative funds have been affected by the market while changing the market ecology.

However, although high-frequency quantitative trading has indeed caused a lot of trouble for many retail investors, this is an inevitable trend.

It's like after the invention of cars, is there still a way out for horse-drawn carriages?

In the future world, many things will be handed over to computers! This is an unstoppable trend.

As for institutions achieving T+0 through short selling, this is a problem with the system.

If ordinary retail investors also open short positions and use T+0, they may be eliminated even faster.After all, short selling can lead to a margin call, the more frequent the trading, the greater the losses.

We can think about it, if it weren't for the capital threshold of trusts and private equity, those trusts that go bust would be the slaughterhouse for ordinary people.

What I want to say is: everything has its pros and cons.

In fact, the advantage of retail investors has never been information, professionalism, technology, and capital. If we use our weaknesses to compete with others' strengths, do we still need to talk about the outcome?

On the contrary, retail investors should use their own advantages to compete with the disadvantages of institutions, which is the way to win.

But I also know that this is impossible to achieve. In this market, making quick money is always the theme, and no one can stop retail investors from short-term speculation.

Until one day, when all retail investors are tamed, the whole market becomes the world of institutions, just like the U.S. stock market.

Then, most institutions can't even beat the index, because there are no weak opponents to harvest!

Why limit high-frequency quantitative trading now?

This is actually a politically correct question.Because the management hopes for a stock market rise, hopes to restore confidence, hopes to develop technology, hopes to boost consumption, and hopes for an economic recovery.

All forces that hinder the rise must temporarily step aside and cool off.

That's why I say, to make money, one must understand the situation and stand with the policy.

Of course, after the market confidence is restored, everything will return to normal. (Some non-compliant transactions will be regulated)

But that time is when retail capital enters the most, and then... you know...

I always believe that as retail investors, we should make full use of our strengths, rather than using our weaknesses to attack others' strengths.