'Dark pools face far less regulation than traditional exchanges like the Hong Kong stock market. Allowing them to compete directly with Hong Kong Exchanges and Clearing under such circumstances would allow regulatory arbitrage. This is unfair competition ...'
Ronald Arculli, HKEx chairman, SCMP, December 12
Years ago a friend and I set up a small institutional brokerage that was indirectly majority owned by a Middle Eastern oil sheikhdom. We did quite well. There was a distinct panache to our backing. But occasionally when we went up on the boards as buyers of a blue chip a rumour would start up - 'the sheikh's in the market' - and then all the sellers would vanish and line up under us as buyers.
To get around it our dealer would have one his friends go up as a buyer while we went up on the offer side of the board. As soon as our dealer thought he had enough sellers behind him, he would tell his friend to scoop all the offers off the board and pull down his own bid. The man would then turn the stock over to our dealer and they would have a slap-up dinner at our expense.
We couldn't do it all the time. The market would get wise. But it worked reasonably well in keeping the minnow seat-holders guessing as to who was behind our trades. It was a nuisance, however. We would have preferred to keep those front-running rat-traders away from feeding off our order flow.
And if we felt this way as a boutique broker in just one market, think how a big investment-management house with hundreds of billions under management must feel about the parasites it faces every time it shows its hand on an exchange. There are 516 of these 'market participants' on the HKEx, of which 500 by my guess do little more than keep a beady eye on the big players in hopes of jumping in first. The big boys have therefore decided to go dark. They deal with each other on privately arranged internet platforms and no one can be sure how much they have traded or at what price.
Ron hates them. Unfair competition, he says.