Support builds for SFC's dark pool rules restricting retail investors

Brokers and operators back regulator's move to bar retail investors from trading platform while providing level playing field for all participants

PUBLISHED : Monday, 03 March, 2014, 2:59am
UPDATED : Monday, 03 March, 2014, 8:36am

Brokers and dark pool operators support a Securities and Futures Commission proposal to restrict trading in such pools to institutional investors, but some warn it could be a difficult rule to implement.

The SFC proposal, unveiled in a consultation paper on Thursday, would require so-called dark pool operators to ensure only institutional investors, such as pension funds, insurance companies and fund managers, are trading on their platforms and to exclude retail trading.

Dark pools allow investors to match orders through an electronic platform with no requirement to disclose their identity or trading volume.

Christopher Cheung Wah-fung, the legislator representing the financial services sector, said he would welcome a ban on dark pool operators providing services for retail investors.

"However, I wonder how the SFC would implement such a rule," Cheung said. "The SFC may need to introduce more detailed guidelines on how it would make sure all dark pool operators would not serve retail investors as some operators might let institutional investors trade on behalf of retail investors.

"The SFC is doing the right thing to ban retail trading on dark pools. Such electronic trading systems are complicated and retail investors may not understand all the risks involved."

Most dark pool operators in Hong Kong do not have many retail investors
Lee Porter, Liquidnet

Lee Porter, the Asia-Pacific head of US dark pool operator Liquidnet, which operates in many Asian markets including Hong Kong, said the SFC proposals were reasonable and in line with other markets.

"In Australia or Canada, the regulators also introduced rules to discourage retail investors from trading on dark pools," Porter said. "They also require dark pool operators to do more reporting in a bid to increase their transparency.

"Hong Kong's SFC has taken these overseas experiences into account."

Porter said Liquidnet would not be affected by the SFC proposal because it did not serve retail customers on its dark pools but mainly institutional investors.

"In fact, most dark pool operators in Hong Kong do not have many retail investors trading at the moment," he said. "The SFC proposal is thus seen more as a measure to prevent many retail investors from trading on these platforms."

David Jenkins, the head of business development at Fidessa, a technology firm catering to dark pools and brokers, said the SFC proposals focused on promoting transparency and protecting retail investors.

"The retail protection proposal could perhaps be revisited in future consultations, given that the technology to maintain price integrity and best execution between the lit and dark markets has been available for some time," Jenkins said.

"Perhaps this may be addressed by further transparency, as while dark pool trades are reported by the operator to the exchange, they are not isolated on the trade feed from the exchange, making it more difficult to determine exactly where crossing is performed as well as the price and volume available in the dark venues.

"If this information was public, it may allow a more sophisticated retail investor to opt in."

An executive at a Hong Kong dark pool operator, who did not want to be named, said the SFC proposal could provide a level playing field for all dark pool operators.

"At present, the SFC gives different guidelines to different dark pool operators," he said. "The proposed new regulation would replace these individual guidelines and provide a single set of standards for all operators. This is a better approach and is in line with international practice."