Exclusive: Bond market makers disciplined for fake trades


The self-regulator of the Chinese interbank bond market has disciplined three market makers on round-trip trading, the first sanction of these bogus transactions.

The National Association of Institutional Investors in Financial Markets (NAFMII), the regulator, sent a critical opinion to Minsheng Bank of China. He also summoned Guosen Securities Co. Ltd. and Guangdong Nanyue Bank for regulatory discussions. The three financial institutions have been ordered to make a fundamental rectification.

Round trip trading refers to the unethical practice of buying and selling the same bonds at the same prices over and over again to create false trading volume. The transactions in question took place in multiple sessions in the fourth quarter of 2020 and did not reflect a reasonable economic goal, making them essentially fictitious transactions, NAFMII said in a statement.

The counterparties to the Minsheng Bank transactions were Guosen Securities and Guangdong Nanyue Bank and involved more than a dozen bonds, Caixin learned.

Market makers, which are usually large banks or financial institutions, help ensure a sufficient volume of securities or bond transactions so that transactions can be carried out transparently. By quoting both the buy and sell price of a bond, market makers provide liquidity to the markets and take advantage of the bid-ask spread.

Some market makers might use round-trip trading to inflate volume to maintain their ranking, and some smaller market makers might do this to build a reputation and maintain their relationships with their customers and their image in the market, said a participant in the bond market.

It may not be a big problem for a market maker to make round-trip transactions, but it is a problem if it becomes common market practice and most of the players are involved in such activities, said someone close to NAFMII. The disciplinary action shows the regulator is trying to “kill chickens to scare away monkeys” in a market warning, the person said.

Market makers play a crucial role. Although China now has the world’s second-largest bond market, market making is still relatively immature and accounted for just 42.4% of all spot transactions in the interbank bond market in 2019, according to a NAFMII. report. This compares to over 95% in some more mature markets like the United States.

Rankings of market makers based on their performance are counterproductive and tend to distort trading behavior, a source close to the central bank told Caixin. NAFMII is considering abolishing the filing system, sources with knowledge of the matter told Caixin.

Recently, NAFMII has actively implemented the demands of the State Council’s Financial Stability and Development Committee, adopting a “zero tolerance” position on all kinds of violations and carrying out self-regulation.

The regulator is stepping up the screening and sanctioning of violations, including bogus transactions, insider trading and market manipulation and has put in place a complaints reporting mechanism, according to the person close to NAFMII.

In January, NAFMII issued revised self-regulatory guidelines on interbank bond market making activities, detailing various violations and tightening restraint on quotes and market making transactions.

Under the guidelines, market makers should not collaborate with other players to trade back and forth at the same or similar prices without a reasonable economic purpose. They are also prohibited from deliberately increasing the volume of transactions.

Contact journalist Denise Jia ([email protected]) and editor Bob Simison ([email protected])

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