Hong Kong retail investors banned from trading on 'dark pool' electronic platforms from Tuesday

PUBLISHED : Sunday, 29 November, 2015, 5:11pm
UPDATED : Monday, 30 November, 2015, 3:24pm

While at least one dark pool operator has withdrawn from the market ahead of a new regulation on electronic trading platforms that comes into effect on Tuesday, others are staying put as they say they support the tighter rules.

The Securities and Futures Commission from Tuesday will introduce a new rule that will bar retail investors from trading on the so-called dark pool electronic trading platforms that match trades for investors while not forcing them to disclose their identity or trading volumes.

The tightened regulation will keep retail investors out of the 15 dark pools in the city that will from now on be open to only institutional investors such as fund managers or professional and experienced investors with portfolios of at least HK$8 million.

French lender BNP Paribas in October told its clients that it would shut down its dark pool platform BIX platform by the end of November, according to a source familiar with the situation. The source told the South China Morning Post that the decision was partly related to the tougher SFC regulation.

A spokeswoman for BNP refused comment.

READ MORE: SFC fines BNP HK$15 million for dark pool failures

Besides barring retail investors, the new SFC dark pool regulation will also require brokers to prioritise client trades over proprietary orders as well as exercise more operational controls. These are expected to add to the costs for the operators.

The SFC in August fined BNP Paribas’ Asia unit HK$15 million for dark pool control failures.

With the departure of BNP, Hong Kong now has 15 dark pool operators. At the time the SFC announced the new regulation, dark pools accounted for about 2 per cent of market turnover. That contrasts with dark pools’ 10 to 20 per cent share in overseas markets.

Western markets allow dark pool operators to directly compete with traditional stock exchanges but Hong Kong still requires them to be members of the stock exchange, which prevents direct competition. Big investment banks such as Goldman Sachs, Morgan Stanley and Credit Suisse all have dark pool operations in Hong Kong.

Regulators in both the US and Europe, however, have started to tighten the rules on dark pool operators to enhance investor protection.

Lee Porter, Asia-Pacific head at dark pool operator Liquidnet, said he supports the SFC’s measures.

“We are supportive of any moves by regulators, including the SFC, to improve market structure and to better protect the interests of the end investor. Dark pools were created for institutions. If they are not fulfilling this mission, that volume should go back to the public exchanges,” Porter said.

“Liquidnet will not be impacted by the new regulations from the SFC as in Asia we only trade large blocks of shares from buy-side institutions. These regulations are largely aimed at greater disclosure and transparency, both of which we are very much in favour of,” Porter said.

Hong Kong Investment Fund Association chief executive Sally Wong said fund managers access dark pool in the interest of clients. “The fact that many managers are using dark pools speaks for itself – dark pools can potentially deliver better outcomes for a better price, liquidity, ability and speed of execution,” she said.

“In view of the benefits, one wonders why retail investors should be denied access. We understand that the ban may arise out of investor protection concerns, especially concerns that the lower visibility of dark pools may put retail investors at an disadvantaged position. But to enable retail investors to avail of the benefits that institutional investors can enjoy, can we try to address the concerns by requiring enhanced disclosure or other safeguards rather than an outright ban?” she said

Benny Mau, chairman of the Hong Kong Securities Association, said he supported the SFC move.

“The dark pool trading platform is not as transparent as the stock exchange. It would not be suitable for the retail investors. It is a good move to enhance investor protection by banning retail investors from dark pools,” Mau said.