Both the buy-side and sell-side in Hong Kong are anxious about new rules being promoted by Hong Kong’s regulator, the Securities and Futures Commission, which are scheduled to come into effect in January 2014.
The portion concerning electronic trading and DMA is so broadly drafted, it apparently catches everything.
It has dawned on smaller brokers that they are doing DMA and electronic trading. Few people think of Bloomberg usage being the same as those tools used by a complex algorithm trader, and yet the way the rules are drafted, everything appears to be encompassed.
“Where the industry is upset about it is that the exchange doesn’t have circuit breakers,” says Philippa Allen, the CEO of ComplianceAsia in Hong Kong. “That pushes the responsibility back to the industry for figuring out if something is going to blow up the system, or cause a flash-crash. And then, is it the sell-side or buy-side that is responsible if trading through electronic systems?”
The SFC has consulted on the plans but so far doesn’t appear to be acknowledging the comments as it pushes through the changes.
The sell-side is striving to obtain some kind of standardised measures for due diligence, in preference to every buy-side fund having to create its own list of questions. Brokerages are spending a vast amount of time on it, to make it look as seamless as possible. One senior member of staff in a bulge bracket firm said, “It’s a huge job. It’s all i’m working on at present.”
A broker is unlikely to be prepared to reveal in full what the programming around the system parameters is in its algorithms, because users could simply replicate it themselves.
“If you’re a Hong Kong licensed person dealing with a Hong Kong broker that’s fine, you can ask them what testing is done on their systems and how parameters work,” explained Allen. “If you are, say, a Hong Kong asset manager and you’re using an Indian broker for DMA, then that Indian broker isn’t likely to provide details of how his system works.”
All the SFC could do is take action against the Hong Kong fund manager for failing in its duty under the code of conduct. They cannot do anything about the Indian broker which they do not regulate.
“My fear is that the SFC might say, ‘you can’t deal with them as you don’t have a reasonable basis for selecting them in your due diligence’,” said Allen.
The rest of the year will be busy as there will be a great deal of industry lobbying from both buy-side and sell-side to get SFC to reduce the scope of the regulations before January arrives.