ORIGINAL RESEARCH article
Front. Phys.
Sec. Social Physics
Simulation of High-Frequency Trading Risks and Regulatory Strategies in China's Financial Market Based on Multi-Layer Complex Networks
Provisionally accepted
- Zhongnan University of Economics and Law, Wuhan, China
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This study addresses the dual structural characteristics of China's financial market—"retail-investor dominance (80% of trading volume) versus foreign capital's technological monopoly (0.3% of institutions controlling 43.6% of order flow)"—by constructing a multi-layer complex network agent-based model (ABM) integrating "regulatory, core institutional, market-maker, and retail investor layers." It systematically simulates risk transmission mechanisms and regulatory strategies in high-frequency trading (HFT) environments. The research reveals that HFT exacerbates market unfairness through technological latency advantages; when communication latency differences exceed 50ms, retail order interception rates nonlinearly surge to 82%. As strategy homogenization coefficient ρ surpasses the critical threshold of 0.65, the market undergoes a percolation phase transition, with systemic risk probability jumping from 0.2 to over 0.7, potentially triggering "flash crash" liquidity crises. Traditional regulatory approaches, hampered by response delays (averaging 2.1 hours), struggle to cope with the real-time nature of HFT and the challenges posed by algorithmic black boxes. Based on simulation results, policy recommendations centered on "technological anti-monopoly," "real-time algorithm resonance monitoring," and "regulatory intelligence" are proposed to develop a modernized, computationally executable regulatory framework tailored to China's market structure, enhancing both market stability and fairness.
Keywords: complex networks, financial markets, High-frequency trading, Percolation Theory, Topological Structure
Received: 27 Oct 2025; Accepted: 26 Dec 2025.
Copyright: © 2025 Jian, Yin and Li. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.
* Correspondence: Hao Li
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