HONG KONG (Reuters) - 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 (BARC.L) 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 centre and may trigger similar action by other regulators in the region, they added.
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 person said.
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 United States.
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 (DBKGn.DE) and Switzerland's UBS AG UBSN.VX 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 pools.
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 closely.
"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 Navaratnam