Business Tianjin Magazine

"There have been days when a stock I bought on the rise in the morning started to plummet in the afternoon trading session, and I could do nothing but watch helplessly as losses mounted with every downward tick," said 52-year-old Deng Liming.

Deng is not alone among the legions of stock traders who find themselves trapped by the China ban on day trading instituted in 1995 to stave off wild speculation. Investors in China can not sell a stock bought on the same day but have to wait until at least the next trading day. Therein lies the crux of renewed debate.

Amid a prolonged slump in the stock markets, calls are mounting for market regulators to allow unfettered day trading.

"Day trading would enable us to correct our missteps and control losses," Deng said.

He is not alone in that opinion. An online survey by Sina.com found that 77 percent of 6,351 respondents, as of November 14, favor the resumption of day trading in the stock market and 54 percent of them said they believe day trading would help revitalize the market.

Certainly, the stock market badly needs a shot in the arm. As equity prices have declined, so have volumes. The combined daily turnover on the Shanghai and Shenzhen bourses, a measure of market liquidity, has fallen to around 100 billion yuan (US$16.1 billion), down from a record high of 544 billion yuan in November 2010.

"Under current rules, the period of each trade execution is forced to extend into the next day, which reduces transaction efficiency and market liquidity," said He Qiang, a professor at Central University of Finance and Economics.

"With day trading, investors can execute several trades a day with limited capital," He said. "That will help revive trading volumes and enhance market vitality, and thus boost market confidence."

Speculative trading

But opponents argue that unencumbered day trading will fuel already excessive market speculation and exacerbate price volatility.

They point out that China's bourses have earned the dubious reputation of being casino-like markets. The nation's investors mainly focus on price movements rather than on the underlying fundamentals of listed companies. They commonly duck in and out of the market trying to make a quick buck.

"In an environment where investors are less patient with the idea of long-term investment, the resumption of day trading would give rise to an orgy of speculation and magnify risks," said independent financial columnist Cao Zhongming.

Speculative trading has been blamed for volatile prices. China's stock market went through a period of intense turmoil during the 1992-94 period, when day trading was still in effect.

The magnitude of change in the Shanghai Composite Index reached 378 percent, according to the 21st Century Business Herald. However, as Chinese investors mature and the market undergoes reforms such as the introduction of financial derivatives and money-market funds, it seems inevitable that day trading will eventually be resumed.

Analysts suggest that the debate should focus not on whether day trading should be reintroduced but rather how it can be restored in some practical manner that reduces speculative activity.

"It is obvious that the market should not simply return to China's previous day trading model, which was defective in terms of fund settlement," said Su Peike, chief researcher on public policy at the University of International Business and Economics.

Su advises regulators to adopt the three-day settlement process widely used in international markets.

When day trading was fully allowed in China, investors were able to get their money back on the same day they sold stocks. Under the three-day settlement system, investors wouldn't be restricted in terms of buying and selling stocks every day, but they would have to wait three days for money to reach their pockets.

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