Hong Kong Bans Individual Investors From Using Dark Pools

Hong Kong’s markets regulator has banned individual investors from using dark pools, forcing them to place all their trades on the city’s only stock exchange.

The Securities and Futures Commission said that complex execution and order processing on dark pools placed individual investors at greater risk than the most sophisticated traders.

The capital-markets regulator also forced the banks that often operate these alternative liquidity pools -- as the SFC refers to them -- to reclassify all the order types that they handle. The SFC published its proposals after the close of Hong Kong’s stock market on Friday. Its consultation on the plans ended more than a year ago.

Hong Kong still allows banks to trade using their own capital, a practice known as proprietary -- or prop -- trading that the U.S. has largely banned. The SFC said that most dark-pool operators in the territory allow prop traders to use their liquidity pools. Because of that potential conflict of interest, the regulator obliged the banks to prioritize transactions between customers.

In dark pools, offers to buy and sell shares are kept secret until the trades have taken place. While this may help investors who wish to hide their trading strategies, the lack of transparency has fueled suspicion that operators don’t treat all their users fairly.

“The SFC is mindful of the growing role of electronic trading in Hong Kong, and has issued recommendations broadly aimed at protecting market integrity,” said Lee Porter, the Asia-Pacific managing director at Liquidnet Holdings Inc., an electronic stock-trading market. “Liquidnet supports measures that will not burden market participants.”

The SFC also required banks to give their clients the right to opt out of using dark pools.

Hong Kong Exchanges & Clearing Ltd. has a monopoly on equity trading in the city.

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