HKEx faces challenge of 'dark pool' trading

With the Singapore Exchange about to start its own 'dark pool' trading system, Hong Kong faces the issue of how to meet the challenge of the new trading mechanism.

A 'dark pool' is an electronic trading platform that allows investors to trade large amounts of stock without their identities, the trading volume or price being revealed.

The dozen 'dark pools' in the city have become increasingly popular with pension funds and asset management companies. They allow institutions to keep their strategies hidden, reduce transaction costs and avoid setting off price movements.

But such secrecy, according to Hong Kong Exchanges and Clearing chairman Ronald Arculli, lacks transparency, and that has led some private bankers and fund houses to ban trades in these systems.

Glenn Lesko, chief executive of Instinet Asia-Pacific, however, said such dark venues as Instinet's BLX help lower trading costs for institutional investors.

'By trading in the dark, you avoid market impact costs as well as the frictional costs involved in executing a large trade in smaller pieces,' Lesko said. 'The argument that 'dark pools' somehow harm retail investors is ridiculous. What are institutions but the aggregation of retail money, be it a managed fund or a pension plan?'

Lesko believes Hong Kong should follow other Asian markets such as Japan, and soon Australia, and allow for competing exchanges. Lesko said there were many brokerages running internal 'dark pools', which local regulations allowed. 'What the HKEx should consider is to allow for competing 'lit' venues [where prices and volumes are displayed]. More competition would bring transaction costs down, yielding better returns for all investors in Hong Kong.'