Earlier this week, the SFC released a circular and a report in relation to its thematic review to assess compliance with the regulatory requirements for Alternative Liquidity Pools (ALPs, commonly known as “dark pools”) by licensed corporations (LCs) and to gather information on the latest market developments.

The review was conducted between 2016 and 2017 on 15 LCs (which were the only active ALP operators in Hong Kong when the review commenced). The SFC found that the LCs had implemented measures to comply with the ALP requirements as set out in Paragraph 19 and Schedule 8 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (ALP Requirements). However, a number of deficiencies were identified, such as those in relation to ensuring that ALP users are qualified investors, disclosing information to ALP users, routing orders to third-party ALPs and posting orders to both the ALP and the exchange.

The SFC has indicated that it will continue to closely monitor market and regulatory developments in ALPs both in Hong Kong and overseas, and may propose further policy refinements and rule changes to maintain an appropriate balance between market innovation and investor protection.


The ALP Requirements apply to a licensed or registered person who operates an ALP, or who routes client orders to an ALP for execution. An ALP is an electronic system operated by a licensed or registered person through which the crossing / matching of orders involving listed or exchange traded securities is conducted with no pre-trade transparency. It includes a system designed and developed in-house or by a third party service provider.

The key ALP Requirements provide for the following:

  • An ALP operator should effectively manage and adequately supervise the design, development, deployment and operation of its ALP, as may be appropriate in the circumstances;
  • An ALP operator should establish and implement measures to ensure that only qualified investors are permitted to be users of an ALP (Qualified Investor Requirement);
  • Irrespective of the time when orders are placed, an ALP operator should ensure that the orders of users which are not proprietary orders have priority over proprietary orders when such orders are being transacted at the same price;
  • An ALP operator should, by means of ALP guidelines, provide sufficiently comprehensive information to the users of the ALP to ensure that they are fully informed as to the manner in which the ALP operates;
  • An ALP operator should permit the users to opt out of matching or crossing their orders in its ALP;
  • An ALP operator should ensure the integrity of the ALP as may be appropriate in the circumstances, including the controls, reliability, security and capacity of the ALP, and have appropriate contingency measures in place in case of any failure;
  • An ALP operator should keep, or cause to be kept, proper records concerning the design, development, deployment and operation of its ALP; and
  • An ALP operator should have procedures in place to ensure that information concerning transactions conducted on its ALP is appropriately reported or made available to its users, exchanges, the SFC and other regulators.


The following are some of the key areas of concern highlighted by the SFC:

  1. Routing orders to third-party ALPs

ALP operators which route orders to third-party ALPs should disclose this in their ALP guidelines along with the opt-out options for the third-party ALPs. These ALP operators should bring their own ALP guidelines as well as the third-party ALP guidelines to the attention of users to ensure they are fully informed as to the manner in which the third-party ALPs operate.

  1. Posting of the same order to both the ALP and the exchange

The SFC noted that most ALPs allowed simultaneous posting of orders to both the ALP and the exchange for more crossing opportunities. This arrangement may alter the order priority in the ALP. As such, the SFC stated that ALP operators should provide users with sufficiently comprehensive information in their ALP guidelines which includes, but is not limited to, details of the order posting feature (eg, orders would be routed to the exchange while simultaneously kept available for trading in the ALP) and the associated order prioritisation.

In addition, ALP operators should design and perform specific testing scenarios to ensure their ALPs operate as disclosed in their ALP guidelines (eg, perform testing on order routing to different execution venues and associated order prioritisation).

  1. Qualified Investor Requirement

The SFC reminded LCs to establish and implement effective controls to ensure that all ALP users are qualified users, as it had noted one case where an ALP operator did not have any measures in place to ensure investors on-boarded overseas were qualified before granting them access in Hong Kong.

  1. Governance processes

The ALP requirements provide that LCs should establish and implement written internal policies and procedures concerning the design, development, deployment and operation of its ALP to ensure that there is a formalised governance process, with input from risk and compliance functions.

However, the SFC noted that there were some instances where compliance functions were insufficiently involved in governance processes, and where ALP related incidents were not escalated to the ALP governance committee. The SFC encouraged ALPs to strengthen their governance processes in this regard.

  1. Information security controls

The SFC noted that there were cases where information security controls were not always applied to conduit systems such as the order management system or electronic trading monitoring system, which could directly or indirectly allow visibility of trading information in the ALP. The SFC emphasised that ALP operators should implement effective controls to restrict access to and the visibility of trading information in ALPs.

  1. Post-trade reviews

The SFC observed that only a few ALP operators implemented post-trade reviews specifically to identify potentially abusive activities, such as gaming activities. The analysis and justification of the appropriateness of the criteria and thresholds used for the post-trade reviews were not documented, nor were they subject to periodic review.

The SFC encouraged ALPs to implement comprehensive post-trade reviews, and to periodically analyse users’ trading behaviour to identify users who exhibited potential gaming behaviour. The SFC also cited as good practices ALP operators which perform risk assessments of their ALP operations and the corresponding controls to ensure proper mitigations were in place and that clear documentation of the risk assessments was retained. These risk assessments could be used to identify potential gaps in ALP control frameworks.


ALP operators should review their systems and existing ALP guidelines and implement any necessary enhancements to ensure that they meet the SFC’s expectations regarding the ALP Requirements. They should also consider adopting the good practices noted by the SFC in the report (if applicable), with any necessary adjustments to suit their specific circumstances. In particular, it is the expectation of the SFC that they should act in the best interests of their clients, execute orders on the best available terms and comply with the regulations applicable to ALP operations.