Tower Research Capital, a New York-based high-frequency trading (HFT) firm, is under fire by Chinese authorities for allegedly smuggling high-tech hardware into the country for the purpose of using it in the Shanghai Futures Exchange (SHFE). The report comes by way of Financial Times, which notes the Chinese customs authorities are determining whether Tower installed illicit "customized processors and networking hardware" that didn't match its customs declaration.
Tower allegedly brought in $17 million worth of hardware into the country. Although the hardware hasn't been seized, the authority handling the case has instructed Tower not to remove any of it from the SHFE server room until the investigation is concluded. Should the allegations ring true, Tower could face "significant fines" and even criminal charges.
High-frequency trading is automated and algorithm-based, and reliant on highly specialized FPGAs and ASICs to do millisecond-quick (or even sub-millisecond) trades. HFT firms go as far as designing their own network cards and software stacks, complementing the operating systems' functionality or bypassing it entirely.
Taking the recent U.S. hardware export controls into context, it may seem odd that China itself would be raising an eyebrow against advanced hardware going into the country, but there's a logical reason. The Shanghai Futures Exchange reportedly only allows "certified brokers" to connect directly to its servers, therefore bypassing precious milliseconds in network latency if they were located farther away.
If Tower employed customized hardware that's faster than expected, that would be seen as a no-no by the SHFE, as the regulatory agency apparently wants an even playing field among all traders. This move comes after the Chinese market regulator announced "comprehensive and systematic regulation" after a big market sell-off in 2024.
The regulation makes sense in theory, but the Financial Times remarks that "people familiar" with the Chinese HFT market state that firms have been abusing a legal loophole by rolling their own custom servers and installing them under the name of approved Chinese brokers.
The report contains no information on exactly what type of hardware is involved in this story, but the recently introduced U.S. export controls cover not just high-end Nvidia GPUs, but all sorts of high-end FPGAs, ASICs, even HBM and standard Intel and AMD processors. It's not hard to imagine that $17 million worth of highly optimized servers have one, multiple, or all of the aforementioned bits of silicon.
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