SFC braces for on-line explosion

The Securities and Futures Commission is setting up a think-tank to study regulatory issues arising from a 'potential explosion' of on-line trading.

'The signal's gone up,' executive director Mark Dickens said yesterday.

'We know something very important is coming. We know, and are getting ready for it.' An on-line trading working group is being established to examine issues such as the impact on the back office, system capacity and steps that need to be taken to ensure a successful order.

A guidance note outlining the SFC's policy on Internet trades released in March last year is 'already under review', Mr Dickens said at a Freshfields legal seminar, as it 'doesn't deal adequately with all the issues'.

James Wood, a Freshfields' solicitor, further identified key legal issues as confidentiality and integrity of communications over the Internet with regard to trades.

On-line trading has yet to take off in Hong Kong, with only 35 financial service firms applying to the SFC to use the Internet - not all of them brokerages.

However, if the SAR is to hang on to its own retail investor business, it must step up its competitiveness in this area, Mr Dickens said.

'If we lose their interest because other markets appear more attractive, then we will lose the liquidity that's the driving force in our market,' he said.

He noted that the Hong Kong Monetary Authority was polling banks to gauge the extent of on-line trading so that it could determine its future impact.

Other jurisdictions have witnessed massive leaps in trading due to the Internet. South Korea, for example, has encountered a 500-fold increase. In the United States, 50 per cent of trading is now retail-dominated.

Inevitably, on-line trading would lead to 'profound changes' in the way the market was regulated, Mr Dickens said.

Hong Kong has emerged relatively unscathed in terms of Internet-related breaches of the law, with a mere two being reported in the past three years.

The stock exchange would double the capacity of the existing system, however, Mr Dickens told the seminar, to be able to handle one million trades a day by June.

Abuses have already become evident in relation to valuations of dotcom stocks, he said.

There will be a 'tightening of standards' in relation to these valuations, starting with the takeovers code, extended out to the stock exchange listing rules.

The SFC will soon issue a guidance note on the valuation of technology stocks. The takeovers executive of the body has also already started rejecting unfounded valuations.

A false reporting bill before Legco will also be pivotal in restraining abuses.

Hong Kong remained the 'only place in the world where it's not a crime to tell a lie to regulators', Mr Dickens said.

However, he emphasised 'our regulation stops at the border, so increasingly, business being done in one market is not business we can have statutory jurisdiction over'.