Quantitative director of a large factory investigated for "brokerage rebates"? Could become the first private equity corruption case

The news of a quantitative employee at Magic Square being investigated for brokerage commission rebates has caused a huge stir. Caixin reporters have verified that indeed a Magic Square quantitative employee is assisting in the investigation for personal reasons. Regarding the rumors of "brokerage commission rebates", a Magic Square quantitative staff member stated that the company itself is not involved in brokerage commission rebates, and the trading commissions are all in the tens of thousands. Reporters also learned from multiple sources that the employee assisting in the investigation mentioned above is Li Cheng, the market director of Magic Square. Li Cheng's involvement in the rebate investigation may relate to a top brokerage branch. Industry insiders have told reporters that quantitative private funds may receive a certain percentage of commission rebates from brokerages based on trading volume, which is a gray area and strictly speaking, considered a violation. In the "Notice on Adjusting the Standards for Securities Transaction Commission Charges", the China Securities Regulatory Commission specifically states that commission collected from institutional investors must not be directly or indirectly refunded to individuals by brokerage firms, in order to prevent potential loopholes in interest transmission. Furthermore, the "Securities Brokerage Business Management Measures" further stipulates that brokerage firms are not allowed to directly or indirectly refund commissions to investors, give gifts or coupons, or provide other non-securities business services. The employee assisting in the investigation pointed directly towards the director Li Cheng Magic Square Quantitative is a leading domestic quantitative private fund, established in 2016, and has gained investor acclaim with its quantitative hedging strategies. In 2021, it reached a scale of up to a trillion, but has shrunk in recent years, with a total management scale of around 500 billion yuan. Recently, Magic Square Quantitative has attracted attention for "abandoning" neutral strategies. Li Cheng is one of the multiple market directors at Magic Square Quantitative. He has many years of experience as a programmer and was involved in developing trading systems at a top brokerage firm. He is also one of the founding partners of Magic Square Quantitative. According to industry sources, Li Cheng has fully experienced the domestic quantitative 1.0 era since 2016, and the news of his involvement in the investigation has long been heard, causing sighs. The public perception of Li Cheng is based on his sharp remarks. For example, in March 2022, he advised clients to fully redeem their own products, which some clients praised for being "genuine"; In 2023, when regulatory measures were introduced to strengthen the supervision of programmatic trading, Li Cheng stated in his social circle that the reduction in stamp duty would enhance product returns, and compared the policy to "a few drops of bird droppings." According to industry insiders, in general, the income that quantitative institutions bring to brokerages is mainly divided into two parts: one is channel sales expenses paid to brokerages; the other is the commissions generated when quantitative institutions trade with the brokerage. In addition, some quantitative trading requires the use of split order algorithm trading suppliers, and the service fees for these services will also be included in the income of the brokerage in which the trading takes place. The "rebate" mentioned above refers to a situation where brokerages usually return a portion of the commission to investors, including quantitative private funds, based on trading volume. This gray practice, although illegal, is not completely prohibited as it aims to give benefits to investors and reduce their trading costs. Why is there a surge in illegal commission rebates? How should one understand the aforementioned brokerage rebate operations? According to information gathered by reporters from industry insiders, in terms of trading rebates, some brokerages privately reach secret agreements with institutional or individual clients who trade at their desks, offering rebates at higher rates than normal to attract frequent trading from clients. For example, they may privately agree with some large institutional clients to charge transaction fees far higher than industry standards and provide rebates in proportion. The rebates can take various forms, for example, being privately handed over in cash, or being provided through fictitious service fee reimbursements, as a way to indirectly give clients financial returns, prompting them to increase their trading volumes. In illegal operations regarding private placement rebates of assets, some brokerages fail to clearly define the rebate details in formal contracts with institutions in their custody cooperation. Instead, they offer high rebates that are not compliant with the regulations, based on the size of the assets under custody, through verbal promises or hidden additional agreements. For example, for institutions that reach a certain level of assets under custody, they privately promise rebates based on a certain percentage of the custody asset returns, with the source and operation of the rebates being out of regulatory view, and they achieve rebate payments through some complex related transactions or false financial processing means. In special business cooperation, some brokerages provide rebates to cooperating institutions in violation of the regulations to promote new businesses or obtain specific business resources. For example, when promoting new financial products, high rebates are given to institutions that help sell them, and the calculation and payment methods of the rebates are intentionally made ambiguous and hidden, going against the principles of integrity and compliance in the financial industry. It must be emphasized that brokerage rebate behaviors seriously violate multiple laws and regulations such as the "Notice on Adjusting the Standards for Securities Transaction Commission Charges," the "Securities Brokerage Business Management Measures," etc., and regulatory authorities have always maintained a high degree of attention and severely crackdown on such activities. It is understood that as early as 2002, the China Securities Regulatory Commission clearly emphasized in the fifth article of the "Notice on Adjusting the Standards for Securities Transaction Commission Charges" that brokerage firms must strictly abide by national financial disciplines, and cannot use cash rebates, gift items or coupons, or provide non-securities business services through improper competition to attract investors for securities trading. In particular, institutional investors' securities transaction commissions are strictly prohibited from being directly or indirectly refunded to individuals by brokerage firms, in order to eliminate potential loopholes in interest transmission at the root. The "Securities Brokerage Business Management Measures" further stipulate that brokerage firms must not directly or indirectly refund commissions, gift items, or provide other non-securities business services to investors. The "China Securities Industry Association's Member Anti-Commercial Bribery Code of Conduct" focuses on the prevention of risks of commercial bribery within the industry. Article five of the code specifically states that brokerage firms may not provide benefits or rebates in secret to responsible persons or intermediaries of institutional clients in brokerage businesses. The "Anti-Unfair Competition Law" and the "Interim Provisions on Prohibiting Acts of Commercial Bribery" provide more extensive legal basis and guidelines for the compliant operation of the securities market, stipulating that operators may not use financial or other means to bribe to sell or purchase goods, and may not provide kickbacks to the other party outside of accounts. In the industry's view, such illegal rebates disrupt the fair competition environment in the market, mislead investor decisions, and increase financial market risks. It is necessary for investors and market participants to have a deep understanding of.Recognize its harm, jointly maintain a healthy, orderly, and legal financial market ecology.This article is reproduced from "Caixin Media", edited by GMTEight: Liu Jiayin.