SFC floats move to restrict dark pool platforms to institutions

Alternative liquidity pools pose risks for retail investors and should be restricted to more sophisticated traders, says city's regulator

PUBLISHED : Friday, 28 February, 2014, 1:10am
UPDATED : Friday, 28 February, 2014, 1:10am

The Securities and Futures Commission yesterday proposed that only institutional investors be allowed to trade on the so-called dark pools of electronic trading platforms where investors do not need to disclose their identity or trading volume.

The proposed regulation would exclude retail investors from trading on any of the 14 dark pool platforms in the city. The proposal will make Hong Kong's dark pool regulation tighter than Canada and Australia, where minimum trading sizes discourage retail trading on platforms.

"A lack of understanding by retail investors, as well as the opaqueness and potential conflict of interest inherent in these [dark pools], might well place this group [of retail investors] at greater risk than more sophisticated investors," an SFC paper said. The regulator expressed concern whether dark pool operators "can properly and sufficiently inform their retail clients concerning the operation, risk and procedures associated with trading" on dark pool platforms.

Jeffrey Chan Lap-tak, the chairman of the Hong Kong Securities Association, supported the SFC proposals to enhance market transparency and to increase retail investors protection.

The SFC unveiled the proposed ban of retail trading in dark pools in the form of a consultation paper designed to collect market views over the next two months. It said Hong Kong has more active retail investors than overseas markets. The regulator also suggested several measures to require dark pool operators to tighten up risk control of their systems and increase reporting requirements to enhance the transparency of dark pools.

Ashley Alder, chief executive of the SFC, said the growth in the number of dark pools "has catalysed global recognition that these systems must be appropriately operated to protect client interests and preserve market integrity. These same considerations apply in Hong Kong as they do in other markets".

Dark pools have emerged as a popular platform in recent years in advanced markets such as the United States and Britain where they are allowed to run independently to compete for business with traditional exchanges.

In the US, dark pools represents about 50 per cent of all trades. However, these platforms only represent 3 per cent of turnover in Hong Kong.