Alternative trading system (ATS) providers were asked, from February 1, to ‘tag’ trades they cross onto the Hong Kong exchange, to make it clear the flow in question is coming from their platforms.
The move is aimed at providing post-execution transparency and more accurate data so that the regulator and exchange can get a feel for how many trades are getting consummated in alternative liquidity pools, says Lee Porter, Hong Kong-based managing director for Asia-Pacific at Liquidnet, a buy-side-only ATS provider.
“When you report a transaction to the exchange, the exchange knows it’s a crossed transaction because it’s flagged as such,” he says, “but it could be an inter-company transfer or a sales trader marrying up a trade or another type of transaction.”
Hence the new guideline will further categorise liquidity crossing onto the exchange, though the data is not being published or provided to the brokers, says Porter.
At the request of the Securities and Futures Commission (SFC), Hong Kong Exchanges and Clearing consulted the relevant brokers on the plan last year. “They asked our opinions on how they should do this and gave a few months’ notice,” says Porter. “It wasn’t just dropped on us.”
Other brokers also argue that it's a sensible move and has been handled well.
At the time, SFC chief executive Martin Wheatley said that having more data would help the regulator to make smarter decisions and recommendations, notes Porter. Wheatley cited the issue of short-selling, making the point that several financial watchdogs brought in bans, but Hong Kong did not, because it was comfortable with the accuracy of its data.
Hong Kong is one of the first Asian markets – if not the first – to make such a request to ATSs, says Porter, and it’s likely that other jurisdictions will follow suit. The guideline is not yet part of the trading rules in Hong Kong, adds Porter, but it may become a requirement down the line.
Some ATS providers might view the move with suspicion, given HKEx's openly stated opposition to dark pools, but he sees no reason to do so. “There’s no reason anyone would have any issue with the request – it’s all about post-trade transparency, and we have no problem with that,” Porter says.
It was relatively straightforward for Liquidnet to implement the tagging system, he adds. “These things are automated,” he notes. “We needed to do a bit of coding with our vendor that connects to the exchange, and it was pretty straightforward and light.”
There are no implications for clients, he says, in that the guideline doesn’t change what they do or how they interact with their brokers.
HKEx and the SFC both declined to comment for this article.