China arrests HK fund executives for an alleged $315 million gain

Shanghai police have arrested 2 executives from a HK-owned High Frequency Trading (HFT) fund for irregular futures trading. This is actually the first public arrest of a non-mainland fund since the crackdown of HFT started a few weeks ago. According to the authorities, the case is still under investigation and two foreign nationals are involved in the case.

Gao Yan, general manager of the company and one of those arrested, alleged that the company used software developed by Mr. Murashov and a foreign technical team to automatically buy and sell futures in huge quantities at prices far from market standards, illegally pocketing more than 2 billion yuan ($316 million). Then Gao sent nearly 200 million yuan of illegal profit to Mr. Murashov and other overseas partners via an underground bank and more than 1 million yuan to technical supervisor. Investigation records show that in one single second in June and July 31 futures were traded – potentially illegally. 

HFT has been in China for years but has become increasingly prevalent as technology platforms have improved and new products and regulations have opened up new HFT opportunities. Although the argument is that HFT can bring liquidity to markets, it can also bring risk, especially for markets like China’s, which are relatively young and somewhat unsophisticated. Regulators will certainly continue to focus on this segment of the market as they seek to both enable market reform, but control risk. This is clearly a warning sign for fund managers looking to leverage more sophisticated trading strategies whether directly on the mainland or through cross-border programs like the HK-Shanghai connect.