"Harvesting" Black Box Strategy! The first case of quantitative rat trading tracking: How did annual earnings reach 88.57 million?

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Making money invisibly!

On an ordinary trading day in the A-share market, the board seems calm, but in the background of the system, an apparently normal buy order has already been split into thousands of sub-orders, surging to the exchange almost by the millisecond.

Few people realize that the flow and rhythm of these sub-orders have long since been locked in advance by the eyes of an "insider."

This "insider" is sitting in the corner of a server room in an office building in Hangzhou, a trading terminal displaying the company's cutting-edge technology on his screen. His employee badge reads "Front-End Strategy Development Engineer," which sounds like a technical support role.

This low-profile "insider," in less than a year, not only enjoyed the generous salary offered by a big quant firm, but also made 88.57 million yuan within a year, "without anyone noticing."

More importantly, this "insider" was not a quant investment researcher.

Calculated by calendar days, he averaged "sitting and earning" 250,000 yuan a day, far more than his daily salary at this famous quant giant.

The reason he could make such "explosive profits" is precisely because he had his hands on the "core button" of this quant giant.

Recently, a regulatory penalty made public China's first ever "rat trading" case in a 10-billion-level quant firm.

Presiding Over a 10-Billion Private Fund Giant

According to Zhejiang Securities Regulatory Bureau’s website, a person named Lin Yiping was involved in this rat trading case.

The penalty shows: From October 2022 to September 2023, Lin Yiping worked at "Hangzhou XX Technology," undertaking front-end strategy development.

The penalty also describes the organization background: "Two private fund managers in Zhejiang province and Hangzhou XX Technology Co., Ltd. are controlled by the same actual controller, managed by the same team. Internal controls and personnel management are all subject to the same requirements at the aforementioned companies."

Market insiders comparing regulatory information and external platforms determine that Lin Yiping worked at an affiliate of High-Flyer Quantitative (幻方量化).

What did Lin Yiping do?

The penalty states: He controlled and used multiple securities accounts, and trades from Hangzhou IP addresses were all decided and operated by Lin Yiping, the related funds raised by him, profits and losses borne by him, to simultaneously buy stocks in Shanghai and Shenzhen exploiting the similarity, earning profits totaling 88.577 million yuan (i.e., illegal gains).

The “Key Person” Closest to the Exchange

What abilities did Lin Yiping possess to “manipulate” rat trading in a quant private fund?

The key lies in his "position"!

According to the regulatory penalty: "Lin Yiping undertook front-end development of trading strategy, product risk control, parts of trading testing, decision-making, order placement, monitoring, etc."

In fact, in the trading process, he plays a crucial role—he is the key person in "the link closest to the exchange."

You can understand it this way: If a quant fund is an automated assembly line, the strategy researcher is like the chef designing the recipe, the risk controller is like the quality inspector, and Lin Yiping's role is like the worker pressing the "start button."

Industry insiders explain that within Lin Yiping’s permission scope, he could see every single trade’s time, price, and quantity for his company’s live accounts.

This information advantage is almost like having the ability to "see the lottery numbers ahead of time."

According to further details in the penalty: "Lin Yiping, not only through his job, could access and query unpublished information about the two private fund managers, but also directly obtained and processed this unpublished information."

How Much Capital Was Used

Illegal gains of 88.57 million yuan may seem astronomical, but translated into capital on a scale ordinary people can comprehend, the power of leverage becomes much clearer.

Let’s set the clock back to Lin Yiping’s employment: from the end of October 2022 to the end of September 2023.

Even though A-shares trended downward, the China Securities 500 index-enhanced product publicly disclosed by High-Flyer Quantitative delivered stellar results: NAV rose 9.99%, outperforming the CSI 500 index by 12.24 percentage points.

And this is just one asset management product (for external clients); returns from High-Flyer's proprietary or other fund products are not fully known to the market.

Suppose Lin Yiping completely copied the above 500-enhanced product’s strategy and there were no extra returns from trading itself, then the required principal would be:

Required capital = 88.57 million ÷ 12.24% ≈ 700 million yuan

Another Estimation Method

Of course, the above is an ideal estimation.

Two other possibilities:

First, the rat account’s return wasn't as good as High-Flyer's public product.

Assuming, for liquidity, Lin Yiping picked highly liquid large/mid-cap stocks and kept cash for T+1 settlement and new stock subscriptions.

Let’s discount the actual position to 60%, so the required capital increases:

Actual capital = 724 million ÷ 0.6 ≈ 1.2 billion yuan

Second, Lin Yiping might have tracked even higher-return products from the company, or high-frequency products, in which case he might have needed less capital.

In the above calculations, leveraged capital such as margin financing and total return swaps is not considered.

If leverage was used, Lin Yiping’s actual capital could have been much less.

The “Secrets” of Quant Rat Trading

The industry generally agrees that quant rat trading and traditional rat trading differ to some extent. The latter relies more on minor market timing and information advantages to complete a precision momentary arbitrage.

Borrowing from a popular industry analogy:

The rat trader, using his “core” position at an asset management institution, gets unpublished information in advance. It's like a theater’s "popcorn buyback" mechanism—as long as the popcorn is unopened, the theater will buy it at a fixed price.

Lin Yiping, at the "exit" of the trading, quickly seizes the chance to buy unopened popcorn from the audience at 30 yuan (that is, uses his information advantage to preemptively buy at the right time).

Then, he turns and sells this popcorn back to the ticket window, using the parent order's time priority to sell at the same price, instantly receiving 30 yuan back.

Precisely because he was responsible for strategy front-end development, product risk control, partial product trading testing, decision making, order placement, and monitoring, he had direct access to the live trades’ “counterparty.”

In other words, he was trading against the company's own internal portfolios—either private fund asset management accounts or the company’s proprietary accounts.

The subtlety of quant rat trading is: "the key person at the key point" takes advantage of the "information gap" in company funds and resources.

In other words, Lin Yiping used his prior access to upcoming company trading decisions to make clever moves, turning the company’s internal information advantages into his own arbitrage opportunities.

But isn’t such an operation more like he was “cutting leeks from his own company,” making huge profits?

Ultimately, the Zhejiang Securities Regulatory Bureau ordered Lin Yiping to rectify, issued a warning, confiscated his illegal gains of 88.577 million yuan, and fined him an equal amount, totaling about 177 million yuan; due to the severity of the violation, a 5-year securities market ban was imposed.

Risk warning and disclaimerThe market has risks, invest with caution. This article does not constitute personal investment advice and does not take into account individual users’ specific investment objectives, financial situations, or needs. Users should determine whether the opinions, viewpoints, or conclusions in this article are suitable for their particular situation. Invest at your own risk. ```