The regulation of electronic trading in Hong Kong

Hong Kong's Securities and Futures Commission (SFC) issued a consultation paper on 24 July 2012 on the regulation of electronic trading and has requested comments by 24 September 2012. The paper is available here:http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=12CP3

The SFC's objective is to build on existing regulatory requirements to provide a more coherent and comprehensive regulatory framework for electronic trading. The new requirements would apply to all banks, fund houses and brokers which use electronic trading systems or provide electronic trading systems to clients.

The proposals consist of general requirements on electronic trading as well as specific requirements for internet trading, direct market access (DMA) and algorithmic trading. The SFC has proposed amending both the general SFC Code of Conduct and the Fund Manager Code of Conduct as well as the Internal Control Guidelines.

The SFC's proposals replicate certain checks and balances which exist in a traditional trading environment to enable prompt assessment of a client's creditworthiness, identification of possible errors in an order, potential short selling / market manipulation and comparison with a client's usual trading patterns prior to execution of an order.

Key new requirements proposed by the SFC include:

(a) in relation to all electronic trading:

1. intermediaries will be ultimately responsible for the orders
2. at least one responsible officer will take up overall responsibility
3. audit logs / incident reports will be kept for at least two years

(b) in relation to internet trading and DMA, firms have:

1. automated risk management controls
2. post-trade monitoring
3. brakes on suspected manipulative or abusive trading activities

(c) firms engaging in algorithmic trading should ensure that their system designers/developers and users have relevant regulatory knowledge.