[West Street Observation] The failure of hot money is an evolution of the capital market

Ask AI · Behind the downturn of prop-trading hotspots, how will the market ecosystem evolve?

Recently, a piece of news about “major prop-trading figures collectively surrendering” has sparked heated discussion in capital markets. Once upon a time, those prop-trading bigwigs who ruled the market with “market feel” have now repeatedly missed their marks, suffering setbacks one after another. The “malfunction” of prop-trading tactics, on the surface, looks like “tech-based trading” losing to “algorithmic trading,” but in reality it is a kind of evolution of the capital market.

Prop-traders rely on technical advantages, capital advantages, and trading experience. They are good at exploiting market sentiment arbitrage; at its core, it is a form of extreme speculation. The moment a new concept emerges, prop-traders swarm in, but what they target is never the long-term development prospects of the industries associated with the new concept. Instead, it is the arbitrage space created by short-term market sentiment. In the survival rules of prop-trading, a company’s fundamentals are not important. What they care about is only whether they can cash in after pushing prices higher and exit safely.

It cannot be denied that prop-trading has positive significance in terms of energizing market sentiment and increasing market liquidity. Especially during periods when market sentiment is sluggish, prop-traders’ trading activities can also help boost confidence to a certain extent.

However, the negative impact of prop-trading tactics on the market is obvious. Without looking at the fundamentals of individual stocks, and focusing only on charts and concepts, listed companies are treated purely as tradable instruments to make speculative profits, completely losing the ability to make judgments based on their inherent value.

More importantly, prop-trading has helped intensify the speculative culture in China’s A-share market, misleading a group of investors into believing they can reap extraordinary profits in capital markets through mere speculation. Some investors have even completely abandoned fundamental research on listed companies, instead studying pure technical strategies such as 龙头战法 (leader-focused tactics), 首板战法 (first-board tactics), and 跌停战法 (limit-down tactics). This is a classic case of confusing cause and effect.

In the past, prop-traders were able to shine for a variety of reasons, largely due to the investor structure unique to China’s A-share market. With a high proportion of retail investors and weak institutional power, market sentiment is prone to dramatic swings—providing prop-traders with broad room to survive.

However, times have changed. In recent years, the ecology of the A-share market has been undergoing fundamental changes. The “malfunction” of prop-trading is not accidental; it is an inevitable outcome of the capital market evolving.

Prop-traders light the fire, while quant funds put it out. But losing to quant funds is only the superficial phenomenon of prop-trading “malfunction.” From the earliest over-the-counter trading, to placing orders by phone and then trading on computers, prop-traders’ methods of execution have also continued to improve alongside technological upgrades. Quant trading is just a trading tool and has no inherent targeted advantage.

As various types of medium- and long-term capital continue to enter the market, the investor structure in the A-share market has changed markedly, with the share of institutional investors steadily increasing. Long-term funds such as public funds and social security funds have continued to flow into A-shares. What they care about is the fundamentals of enterprises, not short-term theme concepts.

When institutional investors become the dominant force in the market, the logic of market pricing also changes accordingly. Whether a stock can rise no longer depends on whether prop-traders “take a liking to it,” but on whether its performance is solid and its valuation is reasonable.

The registration-based reform is being advanced steadily. The number of listed companies has been expanded in an orderly manner, and shell resources have rapidly lost value. Prop-traders may prefer “buying small” and “trading weak-quality stocks,” but under the registration-based system, the investment risks of these stocks have surged sharply. Prop-trading’s “position-pinning” tactics have already turned into transactions with high risk and low returns.

Under high-pressure supervision, regulators have cracked down hard on all kinds of market manipulation behaviors, making it increasingly impossible for prop-traders to keep playing their border-line games—such as false reporting, back-and-forth trading to create artificial activity, and late-session price boosts.

In fact, it’s not that prop-trading has been beaten by quant funds; rather, prop-trading has gradually been eliminated by the new ecosystem of continuous optimization in the A-share market. The A-share market has moved beyond the era of dramatic booms and busts. Transforming prop-trading into value investing is the only choice.

Beijing Business Daily Commentator Dong Liang