The Securities and Futures Commission (SFC), Hong Kong’s market regulator, has begun a two-month public consultation in an effort to bolster its electronic trading rules.
The new regulation will address three core areas of algorithmic trading, Internet trading and direct market access, to form a clearer regulatory framework to meet the rise in electronic trading.
The changes will bring the Hong Kong regulations in closer step with international rules outlined by the regulatory trade body the International Organisation of Securities Commissions and are a sign Asian regulators are starting to tighten rules on automated trading, mirroring similar moves in the US and Europe.
The SFC paper includes guidance for testing algorithmic trading systems and strategies and the implementation of risk management controls. Other areas addressed include general requirements on all forms of electronic trading such as responsibility for orders, management and supervision and record keeping.
In particular, Internet trading and DMA services will require intermediaries to have risk management and supervisory controls in place with automated pre-trade controls and post-trade monitoring.
“We propose that an intermediary should put in place control measures to enable it to prevent the system from generating and sending orders to the market that may be erroneous,” stated the consultation paper.
Ashley Alder, SFC chief executive, said: “The proposed framework aims to strike a balance between facilitating market developments and maintaining market integrity.
“To manage risks arising from the use of sophisticated trading technology and practices, the industry must have appropriate controls in place when conducting electronic trading business.”
The paper is open for comment until 24 September.
Reporting by Richard Henderson