Buy-side Trading in China:The Positive Impact of QFII

Rachel Wu, Head of Trading for Franklin Templeton Sealand Fund, talks about the impact of changes to QFII quotas, what buy-side traders want from algorithmic trading and China’s readiness for HFT.
FIXGlobal: What impact do you think changes to the current Qualified Foreign Institutional Investor (QFII) quotas will have on turnover and volatility?
Rachel Wu, Franklin Templeton Sealand Fund:
The changes will have a positive impact on the A share market as the China Securities Regulatory Commission (CSRC) has increased QFII quotas and lowered the entry barriers. However, the changes will be implemented gradually as applicants for QFII status need to apply for a license, which takes time. In the short term, I do not think we will see a significant change in turnover or volatility; however, in the long term, I think the changes will result in increased market stability.
FG: As a domestic fund, how have you had to change your trading as the QFII programme has come online and what changes do you think you will have to make in the future?
RW: Since the launch of QFII in 2003, market participants have gradually started to understand the philosophy behind investing. As a domestic fund, we are pursuing better execution with low market impact that has a similar target to QFII. Increasing numbers of domestic funds are deploying algorithmic trading systems to manage market impact and risk. Exchanges are also promoting block trading systems to execute more efficiently, and these mechanisms will replace most manual execution in the future.
FG: What do buy-side traders want from algorithmic trade offerings? Are domestic funds in China doing enough to remain competitive in terms of trading systems?
RW: As a buy-side trader, I use algorithmic trade offerings to get a target price with less manual intervention. After Hundsun, which is supporting the third-party development of algorithmic trading, domestic funds are the main users. We use algorithmic trading to satisfy the portfolio manager’s requirement for stable results; however, there are some limiting factors including efficiency, speed and the commission ceiling.
FG: Are you seeing a change in current holding periods and do you see a future for HFT in China?
RW: Increasing numbers of traders are discussing how to reduce trading costs and establish efficient ways to execute orders. When we execute orders, we face several challenges including the issues of fair trading, low liquidity and market impact. China is not ready to introduce high frequency trading (HFT). Regulators are worried that HFT will hurt the market as the market lacks value investing. In addition, potential trading costs are raising concerns.
FG: How are regulators striving to improve access to and quality of information for investors and how will funds benefit from this increased transparency?
RW: China aims to improve market information transparency by establishing a sound and comprehensive system for information disclosure, improving the enforcement of information supervision and establishing a longterm mechanism to protect the interests of investors. Funds benefit from regulators tightening supervisions of listed companies to reduce market price volatility.