CSRC "Program Trading Order Agreement (Draft for Solicitation of Comments)": High-frequency trading abnormalities, securities firms have the right to refuse and report to regulators

China Securities Journal · Zhongzheng Jin Niu Zuo reporter recently exclusively learned from the industry that in order to cooperate with the implementation of the "Regulations on the Management of Program Trading in the Securities Market (Trial)" (hereinafter referred to as the "Management Regulations") and guide securities firms to better carry out program trading, the China Securities Association has drafted the "Program Trading Entrustment Agreement (Model Text) (Draft for Solicitation of Comments)" (hereinafter referred to as the "Model Text (Draft for Solicitation of Comments)"), and recently solicited opinions from securities firms.

It is understood that the main text of the "Model Text (Draft for Solicitation of Comments)" consists of six chapters and 25 articles, mainly including definitions, program trading reports, trading behavior management, high-frequency trading management, default responsibilities, and supplementary provisions, stipulating the rights, obligations, and scope of responsibilities of securities firms and program trading investors.

The "Model Text (Draft for Solicitation of Comments)" specifies the reporting requirements for program trading. The "Management Regulations" require program trading investors to report relevant information truthfully, accurately, completely, and in a timely manner. Based on this, the "Model Text (Draft for Solicitation of Comments)" stipulates the reporting time, reporting information, significant changes, and the confidentiality responsibilities of program trading investors (Party A) and securities firms (Party B).

Before investors engage in program trading for the first time, they should report to the securities firm. After the securities firm thoroughly verifies and confirms the accuracy of the information submitted by the investor, program trading can be conducted. The information that investors should report includes: basic account information, including investor name, securities account code, designated trading member/custodian member institution, product manager, etc.; account fund information, including account fund size and source, leverage fund size and source, leverage ratio, etc.; trading information, including trading strategy type and main content, trading instruction execution method, highest declaration rate, maximum number of declarations per day, etc.; trading software information, including software name and version number, developer, etc.; other information, including Party A (investor) contact person and contact information, etc.; other information stipulated by the securities exchange.

If there are significant changes in the reported information, investors should report the changes to the securities firm before the fifth trading day of the next natural month after the changes occur. Situations that constitute significant changes include: significant changes in account fund size compared to the previous report; changes in the source of leverage funds or significant changes in scale compared to the previous report; changes in contact person; changes in the highest declaration rate of the account or changes in the maximum number of declarations per day; significant changes in the main trading strategy; changes in trading software information; account ceases program trading; other significant changes recognized by the securities exchange.

Securities firms have the right to monitor and identify investors' program trading behaviors, and thoroughly verify the information reported by investors for program trading, including but not limited to penetrating verification of investor identities, verification of account fund information, account trading information, and trading software information.

The "Model Text (Draft for Solicitation of Comments)" clearly stipulates the management requirements for customers engaging in program trading. The "Model Text (Draft for Solicitation of Comments)" specifies the prohibited trading behaviors of customers, and securities firms have the right to effectively manage the trading behaviors of program trading customers in accordance with regulatory requirements, and implement differentiated and strict management of high-frequency trading Specifically, if investors engage in the following behaviors, securities firms have the right to take measures such as refusing investors' program trading orders, canceling related declarations, and reporting to regulatory agencies and stock exchanges: Investors fail to fulfill or do not truthfully, accurately, completely, and timely fulfill reporting and amendment reporting obligations; Investors refuse to cooperate with securities firms in conducting due diligence on program trading, or refuse to accept the verification and inspection by securities firms; Significant technical failures occur in the technology systems used by investors for program trading, or significant abnormalities occur in program trading orders; Program trading by investors may affect the security of the trading system or normal trading order; The actual technology system used by investors for program trading is inconsistent with the system verified, tested, and risk-assessed by the securities firm; Other matters agreed upon by both parties.

The "Model Text (Consultation Draft)" provides a definition of high-frequency trading, which includes the following scenarios as high-frequency trading: If a single account on a single stock exchange submits and cancels orders more than 300 times per second; If a single account on a single stock exchange submits and cancels orders more than 20,000 times per day; Other situations recognized by the stock exchange. If investors engage in high-frequency trading, in addition to the required reported information mentioned above, they should also report the location of the high-frequency trading system's server, test reports, emergency plans in case of failure, and other information specified by the stock exchange to the securities firm.

If investors engage in high-frequency trading that may lead to abnormal trading behaviors as stipulated by the stock exchange, securities firms have the right to take measures such as refusing orders, canceling related declarations, suspending services, or terminating the entrustment relationship with investors, and reporting to regulatory agencies and stock exchanges.

Furthermore, the "Model Text (Consultation Draft)" also specifies the responsibilities and consequences of default. It explicitly states that if either the securities firm or the program trading client violates the agreement and causes actual losses to the other party, compensation liability shall be borne.

It is important to note that the "Model Text (Consultation Draft)" is a non-mandatory text. Securities firms providing program trading services to brokerage clients can refer to the model text to establish agreements based on specific circumstances. Any matters required by relevant laws, regulations, regulatory requirements, and self-regulatory rules to be stipulated in the agreement, regardless of whether the model text specifies them, should be included in the agreement; Matters that significantly impact the parties to the agreement, investor rights and obligations, and matters that the parties to the agreement believe need to be clarified, regardless of whether the model text specifies them, can be stipulated by securities firms based on specific circumstances. The parties to the agreement should exercise their rights, fulfill their obligations, and bear corresponding legal responsibilities in accordance with relevant regulations and the agreement.

Author: Zhao Zhonghao, Source: China Securities Journal, Original Title: "Consultation on the 'Model Text for Program Trading Entrustment Agreement', Defining the Rights and Responsibilities of Securities Firms and Program Trading Investors"