In recent months "dark pool" trading platforms, such as Liquidnet, BlocSec, Posit and Instient, have begun to expand in Hong Kong, Singapore and Japan.

Dark pools of liquidity, originally emerged in the USA, are private trading networks which allow for the anonymous trading of large blocks of shares, away from public order books. Trades are reported directly to the exchanges where the relevant securities are listed, which then clear the trades as soon as they occur. Neither the price, nor the identity of the trading company is revealed when the trade is made. Large numbers of shares can be moved without revealing the fact of the movement to the open market, major transactions are unable to move the market and the risk of information leakage is reduced when trading through a dark pool.

The SFC has recently noted that the anonymous nature of dark pools raises serious regulatory concerns surrounding the potential for market abuse and/or manipulation. Some of the concerns include:

  • the maintenance of a level playing field between conventional exchanges and alternative trading venues;
  • the establishment of an appropriate level of pre- and post-trade transparency by alternative trading venues; and
  • ensuring the operation of alternative trading venues does not result in liquidity fragmentation (which would be to the detriment of the market as a whole).  

The introduction of dark pools in Asia spells increased competition for the region's stock-exchange operators. These developments in the Asian trading environment may ultimately result in calls for regulatory alterations to market structure, so as to ensure that Asian markets remain competitive globally.