French bank BNP Paribas SA is shutting down a private trading platform in Hong Kong that allows investors to buy and sell shares anonymously, a platform known as a 'dark pool', two people with direct knowledge of the matter told Reuters.
BNP has become one of the first victims of tough new Hong Kong rules that are set to increase the cost and risk of operating such businesses in the financial centre as of next month when they come into force.
The move comes amid a global regulatory clampdown on dark pools, off-exchange share trading platforms that allow investors to keep their orders secret, with prices displayed after a transaction has taken place. Critics of the platforms say they distort public markets and disadvantage traditional investors.
BNP sent a note to clients earlier this week saying it was closing its BNP Paribas Internal Exchange, or 'BIX' platform, as of next month, the people said on Friday. The sources, who declined to be identified because the information was not public, said the bank had taken the decision to shut the pool due to changing client needs and tougher new regulations.
Hong Kong's securities regulator, the Securities and Futures Commission, is introducing rules next month that will ban retail orders from dark pools; require brokers to prioritise client trades over proprietary orders; and introduce a range of new administrative and operational controls - measures that brokers say will make it uneconomical to run these private share trading platforms.
Following the closure of its dark pool, BNP's client orders will be sent directly to the stock exchange. However, the bank is exploring setting up an arrangement that would allow it to route orders to a third-party dark pool operator, the people with knowledge of the matter said.
A spokeswoman for BNP in Hong Kong declined to comment.
Although dark pools have flourished in the United States and Europe, where they account for more than 10 percent of the market, they have struggled to take off in Hong Kong where long-standing restrictions protect the exchange from competition.
Hong Kong is home to 16 dark pool operators, accounting for around two percent of market turnover, according to the SFC. Among the operators are Goldman Sachs, Morgan Stanley and Credit Suisse.
The regulator has ramped up pressure on dark pool operators over the past two years. It has dished out fines to some, including BNP Paribas' Asia unit which paid HKD 15 million (USD 1.9 million) for dark pool control failures in August.
The SFC is following in the footsteps of US and European regulators, who worry that dark pools have allowed sophisticated high-speed traders to take advantage of institutional investors, and have served to distort the way share prices form.
Defenders of dark pools say they benefit investors by giving them a better price compared with public exchanges, and by shielding their trading intentions from the rest of the market.
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