CSRC goes digital to track rat traders

Mainland securities regulator hot on the trails of hundreds of unethical asset managers after deploying 'big data' technology in crackdown

PUBLISHED : Monday, 14 July, 2014, 3:09am
UPDATED : Monday, 14 July, 2014, 6:15am

The mainland's securities regulator has fallen for digital technology in a big way, with big data - the collection of large and complex data sets - giving its crackdown on "rat traders" a much-needed shot in the arm.

A China Securities Regulatory Commission investigator said hundreds of asset managers at mutual fund houses and brokerages had been targeted in the latest round of the crackdown, thanks to the analysis of digitised trading information.

The problem of rat traders - asset managers who use inside information to trade through the accounts of relatives or friends - is believed to be rampant in the stock market.

They normally use the tactic of "churning" - engaging in excessive trading - to ensure they can earn money.

In a typical case, a rat trader would buy shares of a particular company just before a multimillion-yuan fund increases its holding in the firm, which would usually cause the share price to rise. The rat account would then cash out and lock up the gain.

Before last year, millions of retail investors had criticised the CSRC for its reluctance to deal a heavy blow to unscrupulous fund managers.

Few rat trading cases were unearthed before then, with investors accusing the regulator of deliberately protecting the reputation of the mutual fund sector.

Several fund managers admitted in private that they conducted rat trading to rake in extra income.

But a weak team of investigators and the lack of a proper mechanism for investigating such behaviour made it difficult for the CSRC to spot the unethical fund managers, the CSRC source said.

Howhow Zhang, the head of research at fund consultancy Z-Ben Advisors, said big data had "helped the regulator redeem its reputation".

"The digital technology enables the investigators to sniff out suspicious trades and many fund managers are fidgeting now," Zhang said.

Accounts held by small investors that frequently pre-empt big funds in buying certain shares can now be easily spotted.

"The investigators came to the company and questioned the suspect fund managers with confidence," said a Shanghai-based fund manager. "The data they used dumbfounded those who committed wrongdoings."

CSRC chairman Xiao Gang, who has pledged zero tolerance of market irregularities, increased the hiring of investigators after taking up his post in March last year.

The CSRC punished 66 people convicted of insider trading last year, more than double the 31 in 2012.

More than 30 insider traders have been uncovered so far this year but sources said the number would soar in the coming months as dozens of cases were already in the hands of the regulator.

Investment consultancy Howbuy said 174 fund managers had resigned this year, a huge brain drain in the mutual fund sector that could spark a crisis in the mainland's equities market.

Sources said most of the fund managers who resigned recently were suspected of wrongdoing.

"The resignations won't exempt them from the investigations and punishment," a CSRC official said.

The mainland's 90 mutual fund firms managed 3.55 trillion yuan (HK$4.43 trillion) of assets at the end of last month.