(Corrects 1st bullet point to say SFC, not SEC)
* SFC held confidential meeting with dark pool operators
* Regulator to focus on conflicts of interest
* Hong Kong home to Asia's third-biggest dark pool market
By Michelle Price
HONG KONG, Aug 1 Hong Kong's securities watchdog
has warned banks it will clamp down on exchange trading
platforms known as dark pools in a direct fallout from a
contentious lawsuit against Barclays Plc in the United
States, people familiar with the matter told Reuters.
The increased regulatory scrutiny by Hong Kong's Securities
and Futures Commission (SFC) could hurt prospects for the
nascent dark trading market in the Asian financial center and
may trigger similar action by other regulators in the region,
Banks in Hong Kong have sought legal advice following a
confidential meeting convened by the SFC's supervisory
department last month, during which the watchdog told firms it
would step-up scrutiny of dark pool marketing materials, one
The regulator also warned it would focus more closely on
potential conflicts of interest that may prevent investors from
being treated fairly when using dark pools, these people added.
The meeting was attended by the heads of compliance at the major
banks, according to one person who was present at the meeting.
The SFC declined to comment. Sources also declined to be
identified as discussions with the regulator were private.
Dark pools are private share-trading venues that allow
investors to buy and sell stocks anonymously, with prices
displayed after a transaction has taken place. They have
attracted increasing scrutiny in recent years, amid claims by
exchanges, regulators and lobby groups that they distort market
pricing and disadvantage traditional investors.
According to the people, the warning by the Hong Kong
regulator stems from Barclays' dark-pool trading problems in the
Barclays is fighting a lawsuit filed by the New York
attorney on June 25 alleging the bank's marketing materials
misled clients on the precise nature of trading in its dark
pool. The lawsuit accuses the Barclays dark pool of giving
high-frequency traders - firms that use sophisticated computer
models to trade in and out of shares in a fraction of a second -
an unfair advantage over investors. Barclays says its customers
were never misled.
Dark trading in Asia lags the U.S. and Europe where dark
pools account for around 17 percent and 10 percent of turnover,
respectively. Japan is the biggest market for these private
share trading platforms in the region, accounting for nearly 9
percent of turnover, with dark trading in Australia at around 6
percent, and 2 percent in Hong Kong.
This week, Germany's' Deutsche Bank and
Switzerland's UBS AG disclosed that they are also
being investigated by U.S. authorities over whether they gave an
unfair advantage to high frequency firms trading in their dark
Carole Comerton-Forde, professor of finance at Melbourne
University, who has conducted extensive research into dark pool
rules introduced in Australia last year, said Asian regulators
had been watching regulatory developments in the U.S. and Europe
"I would imagine big buy side firms are asking for more
disclosure around what is in Asian dark pools, and even more so
after the Barclays stuff," she said.
Hong Kong is home to 16 broker-operated dark pools,
according to the SFC. In February, the watchdog issued a formal
consultation proposing tighter controls for dark pools, but no
new rules have been decided.
(Reporting by Michelle Price; Editing by Denny Thomas and Shri