The Hong Kong Securities and Futures Commission is monitoring the operation of ten 'dark pools' which it has become concerned about.

Secretary for Financial Services & the Treasury, K C Chan, told the legislative council that a dark pool is a major category of alternative trading venues, which allow securities to be transacted, mainly by institutional investors, anonymously and outside traditional exchanges.

"They are opaque due to the lack of pre-trade transparency - i.e. bid/ask prices, and the identity of the parties quoting those prices, are not displayed - and of post-trade transparency - i.e. the details of executed trades are not disclosed to the public,” he said. “This is to cater for the need of institutional investors and others that seek to execute large trades in a manner that will minimize impact on market prices."

Hong Kong's dark pools, he added, are mainly within a broker's or bank's internal system whereby customer orders are channelled to the internal pool for matching, or internalization, before they are routed to the exchange market. However, it is estimated transactions executed in these dark pools in Hong Kong still represent less than 3% of total market turnover.

K C Chan said the government is aware of the emergence of such pools, and of the concern raised over the lack of transparency which can create a two-tiered market, depriving the public of information about stock prices and liquidity.

The government is aware that reviews of the regulation of dark pools have been conducted in the US and Europe, but new regulatory requirements are yet to have been introduced. He said the government will monitor global developments on regulating dark pools and review Hong Kong's regulations, if necessary.