The stock exchange is likely to appeal against a landmark court ruling that its membership application system is unlawful, exchange sources said. On Tuesday, a judge ruled that the Stock Exchange Council must give reasons why an application is refused and allow applicants a chance to address any concerns. The ruling followed a challenge by property developer Pearl Oriental after its securities arm, Pearl Securities, was blackballed last May. Exchange sources said yesterday the body had 'strong reasons' for not disclosing the reasons for the rejection. 'It should be noted that all stockbrokers have to share the burden of compensating clients of any failed broker,' an exchange source said. 'Any failure of a single brokerage may lead to a systemic risk or knock-on effects for the whole industry. 'This is why council members require applicants to have a very high standard of conduct, and will reject anyone who faces allegations of misconduct.' In some instances, council members might have strong grounds for suspicion but insufficient evidence to prove any misconduct. 'On occasion, council members may vote against applicants based on allegations of malpractice or executives' personal integrity. 'If such reasons are disclosed, it may lead to libel suits or [other forms of] litigation.' Mr Justice Brian Keith branded the exchange's secret-ballot system as reminiscent of a 'Victorian era gentlemen's club'. Under the system, an applicant receiving four or more black balls is rejected. No reasons need be given for rejection and there is no right of appeal. A source said the exchange was seeking legal advice on whether to appeal against the Court of First Instance decision. The exchange would not contact Pearl Securities until a decision was made. Sources said senior exchange executives were also considering the options if it was decided not to appeal. One was to call the council meeting again and ask those who voted against the application briefly to explain their reasons for the rejection. However, a source said the exchange had no intention of undertaking radical reform of the ballot system for membership applications. 'The judge did not rule the current ballot system unlawful,' the source said. 'The system was approved by the Securities and Futures Commission, and it has worked smoothly for many years. 'Other self-regulatory bodies use a similar system to approve new members.'