He Qiang's Statement on 3·15: "'Wash trading' manipulation difficult to verify, proposes mobilizing shareholders to launch 'people's war'"

Special Topic: Strengthening the Defense Line for the Rights of Small and Medium Investors — Sina Finance 3.15 Investor Protection Forum

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On March 13, the Sina Finance 3.15 Investor Protection Forum was held, featuring a keynote speech by Professor He Qiang, Honorary Director of the Securities and Futures Research Institute at Central University of Finance and Economics.

He Qiang approached the issue from a technical perspective, directly addressing current market regulation challenges. Using “wash trading” as an example, he analyzed the manipulation tactics, verification difficulties, and proposed a unique regulatory approach: mobilizing the power of small and medium investors.

He first explained the definition of wash trading: “China’s Securities Law explicitly states that wash trading is market manipulation. Wash trading involves two accounts buying and selling to each other, artificially raising or lowering prices to manipulate stock prices and the market.”

He illustrated the operation with a vivid example: Suppose a stock is trading normally at 10 yuan. Suddenly, an account places a large sell order at 10.5 yuan. Ordinary investors wouldn’t buy at 5 cents above the market price, and seeing the large order above, they wouldn’t dare to buy either. But then, a miracle occurs—a large order instantly eats up the 10.5 yuan sell order, causing the stock price to rise by 5 cents. Soon after, another account places an 11 yuan sell order, which also goes unnoticed, but shortly after, a large order eats up the 11 yuan sell order. The stock price easily rises from 10 yuan to 11 yuan.

“Basically, it’s wash buying and selling, with no real loss—at most paying a commission—but it manipulates the stock price by a yuan,” He Qiang calculated. “If they hold 10 million shares, they profit 10 million; with 100 million shares, they profit 100 million—it’s that simple.”

He pointed out that while wash trading is simple to execute, verifying it is extremely difficult. “Regulators need to monitor the market daily, and when signs of wash trading appear, they must investigate further—checking for fund flows, mobile communication, or whether the same controlling person is behind the accounts. It’s very troublesome and hard to gather evidence.” Therefore, manipulating prices is easy, but the cost of investigation is high. Due to regulatory lag, this can seriously harm the interests of small and medium investors.

He recalled an experience when the National Committee of the Chinese People’s Political Consultative Conference inspected the Shenzhen Stock Exchange: “They proudly took us to a small room and pointed at a big screen, saying they have advanced software that can automatically detect wash trading during transactions. That day, it really flagged one—an account of a certain fund and another fund’s account appeared to be wash trading.” He immediately pointed out, “This is the same account, with two sub-accounts involved in wash trading—that’s manipulation. No one would be so foolish as to let different accounts be caught together like that.”

“Different accounts involved in wash trading are hard to detect, and even the most advanced software can’t uncover the background. It requires huge manpower to investigate the background,” he said. Given the shortage of regulatory personnel, He Qiang proposed a unique idea: “Let the CSRC regulators monitor the market daily, similar to the U.S. SEC, which reportedly has hundreds of staff watching real-time data. We don’t have that many people. I suggest mobilizing the power of small and medium investors—launching a people’s war.” The specific approach is: “When you monitor the market, all investors should watch for suspicious trades, take photos of the data, and send them to the CSRC. The CSRC, like the Anti-Money Laundering Bureau at the central bank, would report daily fund flow data, focus on a few suspicious cases, investigate thoroughly, and impose heavy penalties if violations are found.”

He Qiang believes this “people’s war” style regulation can have a deterrent effect: “If wash trading is detected in a few cases and heavily penalized, other institutions will be less likely to use such tactics.”

He concluded by emphasizing: “The most serious issues now are extreme market volatility, excessive speculation, price manipulation, and market manipulation. I believe these are the most severe methods, and everyone should have a deep understanding. I hope regulators will strengthen penalties in this area.”