Letting dark pools compete with HKEx 'unfair'

PUBLISHED : Monday, 12 December, 2011, 12:00am
UPDATED : Monday, 12 December, 2011, 12:00am


A call from so-called dark pool operators for changes in the law to allow them to compete directly with the bourse has been rejected by the chairman of the Hong Kong Exchanges & Clearing, Ronald Arculli, who said such a move would give them an unfair edge.

'The HKEx does not mind facing competition. However, any kind of competition should be on a level playing field,'' Arculli told the South China Morning Post, adding that dark pools would have to operate under the same regulatory regime as the HKEx if they were to compete directly.

Dark pools are popular in the United States and Europe, and allow investors to trade large blocks of stocks via an electronic trading platform without disclosing their identities, price or volume.

In the US and Europe, dark pools can compete directly with traditional exchanges, which have been building faster networks as the new competition erodes their turnover. Some traditional exchanges' turnover has fallen by 60 to 70 per cent because of dark pool competition, and some are taking over dark pool operators to boost their volumes.

Singapore Exchange teamed up with a dark pool operator, Chi-X Global, in November last year to launch the first exchange-backed dark pool, Chi-East, to trade Singapore, Hong Kong, Japanese and Australian shares.

Hong Kong law requires any dark pools in Hong Kong to be members of the exchange and to report all trades back to the HKEx, and investors using dark pools still have to pay stamp duty to the government and trading fees to the HKEx.

This prevents direct pressure on the HKEx, and means the 12 dark pool operators in Hong Kong have a market share of only 3 per cent, prompting the calls from some operators for Hong Kong to align itself with other exchanges and allow direct competition.

Arculli said the HKEx was highly regulated by the Securities and Futures Commission, but the dark pools were treated as brokers by the SFC, which meant they operated under a lighter regulatory regime.

'Dark pools face far less regulation than traditional exchanges like the HKEx,' Arculli said. 'Allowing them to compete directly with the HKEx under such circumstances would allow regulatory arbitrage. This is unfair competition, and if it happened, it would undermine the interests of shareholders.

'Most importantly, the law requires the HKEx to put the public's interest ahead of shareholders' interests. Dark pools do not have the same obligation under the law, and they only want to achieve what's in their shareholders' interests.'

The law requires the HKEx, as an exchange, to get SFC approval for any change in its trading hours, trading fees, trading spread or other listing or trading rules.

But dark pools' brokers status means they can set their trading hours and fees themselves.

Arculli also said traditional exchanges played an important economic role because they enabled capital formation so companies could raise funds. 'Dark pools are only trading venues and don't have the same capital formation functions of the traditional exchange,' he said.

Kenny Lee Yiu-sun, chief executive of the brokerage firm First China Securities, agreed that dark pools should not be allowed to directly compete with the HKEx. 'The dark pools do not have the same levels of transparency as the exchange as they do not disclose the identity and price of the transactions. The SFC should restrict the dark pools to institutional investors only,' Lee said.