Metals Prices Sink After China Targets High-Frequency Trading

On Friday, the Shanghai and London metals markets saw large declines due to increased regulatory crackdown on Chinese high-frequency traders. As a result, many exchanges like Shanghai Futures Exchange, which is the primary venue for trading metals, removed high-speed trading servers from their data centres. Copper, zinc and aluminium fell on both exchanges, with London being the established global benchmark.

This development was precipitated by a rapid rise in copper and tin prices due to the global rush to invest in real assets. The metals reached record highs on the London Metal Exchange.

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Regulatory Action on Trading Practices

To deter disruptive trading practices on the Shanghai Futures Exchange, all brokers must clear their facilities of high-frequency trading servers by the end of the month. Other exchanges will be required to clear high-frequency trading servers by April 30, to mitigate market disruptions caused by excessive amounts of very rapid trades.

The massive volumes of trades that rose dramatically on the Shanghai Futures Exchange were predominantly driven by bullish sentiment and activity in all financial markets in China.

Market Impact and Earlier Rally

Prices had a quick drop after the announcement, reversing increases during aggressive trading in mainland futures. Price surges during aggressive trading were propelled by a high number of high-frequency transactions, which also led to price increases across all markets globally. However, due to low levels of volume and volatility, this trend will likely decrease, and prices may stabilise as core trends continue.

There were losses across all metals traded on the London Metal Exchange and Shanghai. Losses on the LME were offset by price increases earlier this week in tin and copper.

Broader Context of Trading Dynamics

More broadly, the impact of high-frequency trading on the flow of the marketplace is evident in the increased volatility in price dynamics resulting from high-frequency trading activities. Most regulators still feel that the best way to ensure high-frequency trading remains constantly fluid is to continue developing hardware that increases the ability to process large amounts of data rapidly.

This activity shows that regulators continue actively to manage instability in the metals markets as trading activity expands rapidly, and exchanges will try to cater to both fast execution and orderly trading practices as their volume increases.