China Probes Foreign ETF Trading Amid India Scrutiny

China Intensifies ETF Scrutiny of Foreign Firms

Chinese regulators are casting a sharp eye over the participation of foreign brokers in the nation's substantial $859 billion exchange-traded fund market. The intensified review, seeking detailed information on trading activities, follows recent regulatory actions against major players like Jane Street Group in India. This move signals Beijing's increasing attention to foreign involvement in its rapidly expanding financial sectors.

Global Market Makers Under the Lens

The focus is on firms such as Jane Street, Optiver, Susquehanna International Group, and Hudson River Trading, which are significant foreign market makers in China's ETF space via the Qualified Foreign Investor (QFI) program. As of June 30, Jane Street was identified as the largest foreign participant. However, this activity represents a relatively small fraction, less than 2%, of mainland China's overall ETF trading volume, according to individuals familiar with the matter.

UBS's Precautionary Pause

The regulatory inquiries have already prompted action from financial institutions. UBS Group AG reportedly paused certain trades from Jane Street through the QFI program late last year. While this move was considered precautionary and did not disrupt Jane Street's broader China strategies, it highlights the immediate impact of Beijing's heightened scrutiny. Barclays, another key broker for foreign ETF market makers, declined to comment on its trading relationships.

India Case Looms Large

The backdrop to China's current focus is the ongoing investigation into Jane Street in India. Indian regulators accused the New York-based firm last year of misleading retail investors through alleged index manipulation, charges Jane Street denies. The firm was temporarily barred from trading but complied with an order to place $570 million in escrow. Jane Street is awaiting a judicial appeal hearing scheduled for January 19.

Market Stability Concerns

This increased oversight underscores China's deep-seated sensitivity to stock market volatility. The Chinese market, heavily influenced by retail investors, is known for its sharp price swings. Beijing has historically employed a range of measures, including regulatory interventions and state-backed fund activity, to manage market performance and dampen excessive fluctuations. The current scrutiny of foreign ETF players could be another step in this ongoing effort to maintain market stability.