On Thursday afternoon we warned:
dear HFTs, get ready to be the scapegoats
— zerohedge (@zerohedge) August 20, 2015 [6]
That could obviously apply in a number of jurisdictions, not the least of which are US equity markets which suddenly seemed to have lost their way amid Fed confusion, EM turmoil, and an FX bombshell out of China.
Indeed we’ve long said that the vacuum tube crowd will be trotted out as the culprit if and when central planners finally lose all control both of markets and the narrative, and nowhere are authorities losing control of both more quickly than in China, where keeping the equity dream alive via a CNY1 trillion plunge protection scheme is becoming more and more difficult by the day. To wit, from overnight:
Perhaps the biggest surprise about the overnight Chinese stock rout is which followed the lowest manufacturing PMI since March 2009, is that it happened despite repeat sellside pleas for a PBOC RRR cut as soon as this weekend: usually that alone would have been sufficient to push the market back into the green, and it almost worked when in the afternoon session stocks rebounded after dropping as much as 4.7% below the "hard" floor of 3500, but then a second bout of selling just before the close took Chinese stocks right back to the lows with the Shanghai Composite closing at 3,507, down 4.3% on the day, having wiped out the entire 18% rebound from July 8 when the PBOC first threatened both sellers and shorters with arrest.
Which is probably why threats of harm had to be repeated: around closing time, the Chinese SEC said it was investigating major stakeholders of listed companies for illegally reducing holdings.
And because that may not be enough, we got the following this morning, which confirms precisely what we said above:
BREAKING: Chinese securities regulator has issued notice to local brokerages to launch investigations on "quant hedge trading" - state media
— George Chen (@george_chen) August 21, 2015 [7]
Official media Securities Times: China's investigation on "quant hedge trading" will focus whether it's "fair" for market, retail investors
— George Chen (@george_chen) August 21, 2015 [8]
Well, of course it's not "fair" for retail investors to pay a tax they can't even see on every single trade so algos can scalp billions in exchange for their liquidity provision services that don't really provide any liquidity and rest assured that if someone in the Politburo gets word that some quote stuffing, spoofing algo triggered a sharp move to the downside that in turn cost the PBoC a few extra billion in plunge protection "loans" to CSF, well that will be all she wrote for China's newly-arrived Flash Boys [9].