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US quant trading giant Tower Research Capital is under investigation in China on suspicion of smuggling advanced trading hardware into the country.
Chinese customs authorities are examining whether New York-based Tower installed customised processors and networking hardware at Shanghai Futures Exchange (SHFE) that did not match an earlier customs declaration, according to three people with knowledge of the investigation.
The Shanghai Special Commissioner’s Office of China’s General Administration of Customs, the watchdog carrying out the probe, has told Tower not to remove equipment from the exchange’s server room before the investigation is concluded, one of the people said.
Tower’s imported hardware is estimated to be worth more than Rmb120mn ($17mn), the person said. If any violations are confirmed, Tower could face significant fines from evading import taxes as well as potential criminal charges given the scale.
The probe into Tower comes after Beijing tightened oversight of quantitative trading firms following a steep market sell-off at the start of 2024. In May last year, the China Securities Regulatory Commission, the country’s market regulator, announced “comprehensive and systematic regulation” on quantitative trading, but mainly targeted stock trading rather than the commodities markets where the US quant fund trades.
The customs authorities have also referred the case to China’s financial regulators, to look into whether Tower has connected its customised servers directly to those of the exchange, according to two of the people.
Speed of connection is important for high-frequency traders, who use complex algorithms to exploit small price discrepancies within milliseconds. But Chinese regulation allows only certified brokers to connect directly to the SHFE’s server.
Any connection of unregulated, customised servers could be “hugely risky to the system and unfair to other traders”, one broker in Shanghai said.
However, people familiar with such trading in China said multiple high-frequency traders have been exploiting a loophole by having their own servers — which are tailor-made to maximise the trading speed of their in-house strategies — installed under the names of their Chinese brokers.
Tower, founded in 1998 by former Credit Suisse fixed-income trader Mark Gorton, was one of several US quant trading houses that entered China about eight years ago, and traded mainly commodities and their derivatives in the country.
Tower did not respond to a request for comment. China’s customs agency and SHFE did not respond to a request for comment.
With additional reporting from George Steer in New York, William Sandlund in Hong Kong and Wenjie Ding in Beijing
