Ronald's last hurrah just shadow boxing

PUBLISHED : Thursday, 26 April, 2012, 12:00am
UPDATED : Thursday, 26 April, 2012, 12:00am


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 scrutiny.

SCMP, April 23

Ron Arculli is on a crusade again. In a parting shot as he stepped down as our stock exchange chairman, he donned armour and belted on his sword and waved it threateningly at the evil Dark Pool.

Before we go too far down the line with this metaphor of shining knight rescues fair maiden, however, and remembering that there is no fair maiden here anyway, just how evil is the dark pool and how noble the motives of the stock exchange that seeks an end to this upstart?

Our stock exchange is a relatively new creation. It was put together in 1986 as a branch of the civil service (government has a majority of the votes) by combining three other stock exchanges and a practical joke, the Kowloon Exchange, which someone thought was real.

To make this merger palatable, all seat holders of the former exchanges who wanted a seat on the new one were given one. We still have almost 500 of these 'participants' on the exchange at the moment.

Their favourite way of making money is to wait until they see signs of one of the big players making a move. They then jump in first.

Big institutional investors naturally see this as an annoyance and have long sought to rid themselves of these parasites. They have found what they want in dark pools - unofficial website exchanges run by other trusted institutional players, where they can deal with each other in privacy without alerting all others and ruining their prospects of getting a normal market price.

And what is so bad about that?

I think Ron should look into the future a little rather than playing knight errant. He may find that in years to come there is no role for old-style stock exchanges anyway.

They were all very well when the only way for someone to announce his intention to buy or sell among a group of like- or opposite-minded individuals was to raise his voice. This is what they call 'open outcry'. Nowadays you can whisper and yet be heard round the world instantly. In fact, you don't even have to whisper. You 'click'.

So who needs a trading floor? The whole world is an exchange now. Just log on and post your bid or offer.

But what you do truly need is a reliable guarantee that the securities you have bought are yours. For this you need a registry and you need it in a legal jurisdiction where the rule of law prevails and where clear ownership rules have evolved through long practice.

In this town it means reporting your trade back to Hong Kong Exchanges and Clearing. That's how you get secure title to securities listed in Hong Kong and, as Ron knows quite well, even the people who deal in dark pools here come into the daylight sooner or later to do it.

But as a fee for the privilege, both buyer and seller have to pay the Hong Kong government a stamp duty of 0.1 per cent of the value of the trade they register. This tax brought in HK$24 billion to our public purse in the last fiscal year, 7 per cent of total fiscal revenues.

Call it our pay-off for the respect the world has for the security of our legal system. Rule of law can have direct cash benefits. This is one of them.

I believe that in 10 years or so it will be the only service of real value that our stock exchange will have to offer, other than deciding what prospective new listings will be permitted to give investors access to this service. The actual business of trading will go to people who have already proved they can do it more efficiently.

The Securities and Futures Commission will, of course, protest that this will make regulation more difficult. What it will really do, however, is put the SFC to the test of whether investors really value the protection it offers. If they do, they will put their trades through the stock exchange. If they do not, they will go dark.

The SFC will shun this test of course. I know why.