SFC consults on Hong Kong dark pools

Hong Kong's Securities and Futures Commission has commenced a two month consultation concerning the future regulation of dark pools.


Hong Kong’s Securities and Futures Commission (SFC) has commenced a two month consultation concerning the future regulation of dark pools, (for which the SFC is employing the term ‘alternative liquidity pools’).

The SFC wants to standardise the regulation imposed on Hong Kong licensed corporations that operate dark pools, by putting in place ‘comprehensive requirements governing their operation’ in its Code of Conduct.

“The proposals aim to strike a balance between market development, market integrity and investor protection, taking into account the needs and circumstances of the Hong Kong market,” said Ashley Alder, chief executive officer of the SFC.

The current case-by-case basis of imposing conditions will cease.

The proposals put forward in the consultation include the restriction of access to institutional investors, improving disclosure, ensuring the priority of agency orders over proprietary orders initiated by dark pool operators, limiting the level of visibility of trading information available to the staff of dark pool operators, maintaining system adequacy and introducing additional control, record keeping and reporting requirements.

The SFC said that the proposals draw partly on the experiences of other regional jurisdictions that permit dark pools.

“It is clear that the SFC has been looking at juridictions like Canada and Australia,” says Lee Porter, Asia pacific managing director of Liquidnet. “The industry wants to see regulators looking at other markets and sharing their experiences. We will be sending in our formal response to the consultation.”

 However, the Hong Kong outcome, where dark pool turnover is approximately 3% of monthly turnover, is not likely to mimic that of, say Australia, where greater volumes are transacted, and therefore regional operators will need to maintain flexible service infrastructure.

A spokesperson for Fidessa, commenting on the SFC’s initiative, said that the consultation proposals, “placed the focus on minimal level of operating standards for dark pool operators and promoting transparency in their operation, rather than imposing best execution obligations such as meaningful price improvement, pre-trade reporting or minimal crossing thresholds, as in other Asia-Pacific markets.” Fidessa also suggested that the retail protection could be revisited in future consultations.