New regime for dark pools effective 1 December 2015

Hong Kong’s new regulatory regime for alternative liquidity pools (ALPs) will come into effect on 1 December 2015. 

The new regime, set out in a new Paragraph 19 and a new Schedule 8 to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC), follows a public consultation earlier this year and applies both to ALP operators and licensed corporations that route client order to ALPs.  The consultation conclusions are available here: http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=14CP3

The SFC has highlighted some aspects of the enhanced regime:

• No individual investors (including individual professional investors and their wholly owned investment holding corporations) will be allowed to use dark pools.
• Client facilitation orders will be treated as proprietary orders, which will have a lower execution priority in ALPs than agency orders.
• There will be no mandatory opt-in requirement before client orders can be routed to ALPs, but ALP operators should permit their clients to opt out of ALP use.

Whilst ALP trading volumes are relatively small in Hong Kong – according to the SFC, trades executed in ALPs declined from 2.3% to 0.9% of the total market turnover during the period August 2013 to April 2015 – the SFC’s view is that international experience suggests that alternative trading venues could in time have a huge impact on market functionality.

Last month, the SFC fined an ALP operator HK$15 million for ALP-related failures.  The SFC’s press release quotes its Executive Director of Enforcement, “No one should dive into dark water without knowing what’s hidden.  Operators must have clear rules and procedures in place for operating dark pools, and equally important, they should operate consistently with representations to clients whose consent to enter the dark pool is clear and well-informed.”

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