HONG KONG: The Securities and Futures Commission fined French financial institution BNP Paribas Securities (Asia) HK$15 million for lapses in conducting its dark pool trading services here the other day.
An SFC investigation found the firm’s dark pool trading services, known as the BNP Internal Exchange (BIX), failed to operate in the period between November 2009 and April 2011 in the way it had informed its clients.
No one should dive into dark water without knowing what is hiddenMARK STEWARD, SFC.
Dark pools are off-exchange electronic trading systems that match buy and sell orders without disclosing the identity of the parties, prices or volumes.
“No one should dive into dark water without knowing what is hidden,” said Mark Steward, executive director of the SFC.
Steward said all such operators “must have clear rules and procedures in place for operating dark pools and they should operate consistently with representations to clients whose consent to enter the dark pool is clear and well-informed”.
The regulator said BNP Paribas Securities Asia had informed its clients that trades via BIX would be executed in accordance with order price priority so that a buy order with higher price would have priority over a buy order with a lower price.
BIX failed to give priority to higher-priced orders and treated all orders as having equal priority with allocations on a pro rata basis between November 2009 and April 2011,” the SFC said.
The company suspended BIX services in April 2011 after it discovered its order matching was not conducted according to order price priority.
“BIX services were not fully restored until seven months later and the SFC was not informed of the suspension until 21 months later in January 2013. This constitutes a breach of BNP Paribas Securities Asia’s licensing condition,” the SFC said.
The SFC also said that when the company applied for a dark pool licence, its business plan submitted to the regulator had said it would get clients’ consent before their orders were placed on BIX for matching.
However, the SFC found out that BNP clients’ orders intended for execution on the stock exchange were automatically enabled on the BIX system, without first seeking clients’ consent.
“The SFC was not notified about the change of BNP Paribas Securities Asia’s business plan as required,” the SFC said, adding that the company breached Section 4 of the Securities and Futures (Licensing and Registration) (Information) Rules which require a written notice to the SFC within seven business days after any change of the business plan provided to the SFC.
“As a licensed corporation, BNP Paribas Securities Asia has to exercise due skill, care and diligence in conducting its business in regulated activities and to act in the best interests of its clients,” the SFC said.
The regulator earlier this year announced it would tighten rules for dark pool operators from December 1 and would ban any retail investors to trade on the system. Only sophisticated professional investors, insurers, fund managers and pension fund managers will be traded on such platforms, under the new rules.
