CHINA, 2 November [Bloomberg] — Shanghai police raided hedge fund Zexi Investment on Sunday, taking away computers and other materials, according to a person familiar with the matter, in the latest attempt by Chinese authorities to crack down on strategies blamed for exacerbating a $5 trillion stock-market rout.
Xu Xiang, the general manager of top-performing Zexi, was detained on charges including insider trading and stock manipulation, the official Xinhua news agency reported. Two executives at Jiangsu-based Yishidun International Trading and the technical director at Shanghai-based Huaxin Futures were arrested after a police investigation showed they made 2 billion yuan ($316 million) in “illegal profit”, Xinhua reported separately, citing the Ministry of Public Security. Agricultural Bank of China Ltd. President Zhang Yun was taken away to assist authorities with an investigation, people familiar with the matter said on Monday, who didn’t give details.
Highlighting the tense environment sparked by the probes, Chinese social media was set abuzz Monday morning by an unconfirmed report of a man associated with the insider trading probe who was shot and killed by police while trying to escape apprehension. The report was retracted less than an hour after being posted to various websites, including that of China National Radio. A person at China National Radio’s news department, who refused to give their name, said the police had informed the broadcaster that the information was untrue.
Chinese authorities have intensified their investigations into sophisticated trading strategies amid accusations that their strategies worsened the stock selloff. The nation was home to the world’s most-active futures market until policy makers raised margin requirements, tightened position limits and announced probes into “malicious” short sellers.
Zexi, which managed four funds that are among China’s top 10 hedge funds in the June to August period, according to Shenzhen Rongzhi Investment Consultant Co., occupies half of the ninth floor in the BEA Finance Tower in Shanghai’s Lujiazui financial district. The office was closed around 8 a.m., with a stack of Monday’s newspapers left by the front door. Calls made to the office went unanswered. Zexi doesn’t short in the market and doesn’t even own a stock index-futures account, the firm told the Economic Daily’s website, in an article posted Sept. 24.
The Shanghai police told the building’s management to lock Zexi’s office door so nobody – including employees – can enter, said the person familiar, who asked not to be identified because the matter isn’t public. Two calls to the Shanghai police department’s press office went unanswered, and a press office official who was reached on his mobile phone said he couldn’t respond to queries.
Yishidun and Huaxin had “foreign technological support” in developing high-frequency trading software, Xinhua said, without naming any firms. Calls to Huaxin went unanswered, and Yishidun’s phone number isn’t registered, according to public records searches.
China’s securities regulator released draft rules last month that would increase its oversight of algorithmic trading. Those who use automated orders to buy and sell stocks would need to report certain information and wait for a review before they’re allowed to execute their strategies. Orders shouldn’t originate from offshore computers or domestic systems that are controlled from overseas, according to the China Securities Regulatory Commission’s proposal.
Authorities are targeting futures because selling the contracts is one of the easiest ways for investors to make large wagers against stocks. It’s also a favoured product for short-term speculators as the exchange allows participants to buy and sell the same contract in a single day.
Yet futures are also a popular tool among sophisticated investors with longer-term horizons. For hedge funds, they provide an easy way to adjust exposure to market swings. And large institutions use them to make cost-effective asset-allocation changes.