Exchanges unite to take on dark pools
Operators of the world's 50 largest stock exchanges are working together to call for regulatory change to combat off-market trades in large blocks of shares held in so-called dark pools because they are concealed from public scrutiny.
Outgoing Hong Kong Exchanges and Clearing chairman Ronald Arculli said the World Federation of Exchanges members would fight for international regulatory reform to safeguard the interests of traditional exchanges and investors.
Arculli steps down from his position with the HKEx today, but will remain chairman of the federation until October. The federation was now a loose alliance of the world's biggest traditional stock markets with a combined market capitalisation of US$55 trillion, but this was due to change, Arculli said.
'The federation will be restructured to become a closer alliance of traditional exchanges worldwide. It will hire a full-time chief executive over the following months who will handle the lobby work for global stock exchanges to regulators worldwide,'' Arculli said.
Reform aimed at ensuring that all trading in shares was regulated and transparent - including trades in dark pools - will be a priority for the more tightly-knit federation.
'We will call on securities regulators worldwide to review current regulations,' Arculli said. 'We want them to make sure that dark pools and other electronic trading systems are subject to the same level of regulation as traditional stock exchanges. This would ensure fair competition,'' he said.
Traditional exchanges are subject to more regulations than private electronic trading systems. In Hong Kong, the HKEx, which is the operator of the local stock market, must get the approval of the Securities and Futures Commission for new product launches, or to make changes to trading rules and fees. But operators of dark pools can set their own rules.
'Traditional exchanges provide a platform for companies to list and to raise funds, and have an important function in society. Dark pools do not have this function as they are for trading only,'' Arculli said.
In the United States and Europe the volume of trading done in dark pools and on other private electronic trading platforms had begun to erode turnovers of traditional exchanges, since regulations in these markets allowed dark-pool operators to compete directly with traditional exchanges.
Turnovers at some US and European stock exchanges have fallen by as much as two-thirds in recent years as bigger and bigger blocks of shares change hands in dark pools or on other electronic trading systems.
Hong Kong law requires any operators of share trading platforms to be members of the exchange and to report all trades back to the HKEx, a regulation that has saved the local bourse from suffering the fate of other exchanges. Twelve dark pool operators in Hong Kong have a market share of only 3 per cent.
But Arculli warned that this might change.
'Dark pools previously served only institutional investors such as pension funds or insurance companies who traded in large blocks of shares,' he said. 'However, some of these operators now handle trades of as few as 300 shares.
'This shows some dark pools are now eyeing retail investors as well.'
Christfund Securities chairman Christopher Cheung Wah-fung said regulators should not allow retail investors to trade on dark pools as there was not enough transparency.
Paul Chan Mo-po, legislator for the accountancy profession, said regulators should require dark-pool operators to enhance their transparency to protect investor interests.